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T H U R S D A Y , J A N U A R Y 3 , 2 0 0 8
Big “I” National News
P&C Trends
Outlook 2008
A look at what’s in store for the industry in the upcoming year.
Strong underwriting performance and continued profitability are expected for the p-c industry in 2008, despite possible negative growth in premiums, according to industry forecasters and analysts.
This year, the continuing decline in catastrophe losses in 2007 along with strong performances in almost all major p-c lines, will likely lead to one of the industry’s best underwriting performances in 80 years, according to the Insurance Information Institute (III) 2008 Earlybird Forecast.
The industry’s profitability is expected to continue in 2008, however underwriting performances will generate smaller underwriting profit. Analysts are also expecting premium growth in 2007 to come in below expectations with the outlook for 2008 flat to slightly negative.
The III’s forecast calls for .3% negative growth in net written premiums for 2008, which is a slight decrease from the zero growth estimated for last year. If this projection holds true, 2008 will represent the first decline in annual premiums since 1943 when premium volume declined by 2.4% in the midst of World War II. This forecasted decline in premium growth isn’t surprising --- due to the continued softening of the p-c pricing environment, growth has been falling since its peak of 15.3% in 2002. The exception to the decline is in hurricane-exposed coastal property insurance coverages, where insurers are charging premiums commensurate with the risks they assume.
Standard & Poor’s forecast for 2008 backs up the III, saying that “there are speed bumps ahead” for the industry, however the ratings service is predicting a very profitable year for commercial carriers.
Meanwhile, Fitch Ratings is projecting a 0.1% increase in net written premiums and says the 2008 ratings outlook for personal and commercial lines is stable despite some deterioration.
“The rating outlook in commercial lines considers the recent string of favorable underwriting performances in most segments, and though results are deteriorating, a severe downturn in market fundamentals is not anticipated. Also, the market’s reserve positions have vastly improved, particularly in longer-tail casualty lines, with many companies currently in an adequate or modestly redundant reserve position,” say Fitch Ratings. “The rating outlook in personal lines reflect that auto lines in most states have produced strong underwriting results in recent years. Though results are deteriorating currently, Fitch’s forecast is for more modest underwriting profits in the near term. Though likely to under perform commercial lines results in the near term, personal lines downturns are historically less volatile than commercial lines.”
Underwriting profits are also expected to fare well this year, however they won’t rival those of the Fortune 500, according to the III.
“The anticipated underwriting profits in 2008 will help insurers earn their cost of capital (the rate of return necessary to retain and attract capital) for just the third time in many years even though industry profitability as a whole ---with and ROE in the 11 to 12% range --- will likely fall short of the Fortune 500 group for the 21st consecutive year (every year since 1987),” says the III forecast.
The III is predicting a combined ratio of 97.3 for 2008, a deterioration from the 93.8 estimated for 2007, and Fitch Ratings is projecting a 98.1 ratio. Both these estimates assume catastrophe losses will be at normal levels. The slimmer margin of underwriting profitability could be eliminated if catastrophe losses return to moderately high levels, but could also expand if losses remain below normal.
The magnitude of catastrophe losses won’t be determined until the 2008 hurricane season is history, but the season is expected to produce seven hurricanes in the Atlantic, three of them major storms, according to William Gray, a hurricane forecaster at Colorado State University. Gray and his team at CSU are predicting a 60% chance that one of 2008’s major storms will hit the U.S. coastline. The 2007 season produced a total of 14 named storms, including six hurricanes, two of which were major storms. Only one hurricane, Hurricane Humberto (Sept. 2007), hit the United States, along with one tropical storm and three tropical depressions, according to the National Oceanic & Atmospheric Administration (NOAA), which says the 2007 season was unusually tame given the climate patterns.
Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.
P&C Trends
Technology Triumphs
For independent agents, technology’s role continues to expand.
The importance of technology to the independent agent has grown exponentially in the last few years, as the majority of agencies are now relying on Web sites to keep their businesses running, according to the 2007 Best Practices Study.
According to the study, at least 75% of agencies in every revenue category have a Web site which is used for prospecting, advertising, customer service and/or a source of information for customers.
“Having a Web site is no longer the exception, says Kay Barrett, vice president at IMA of Kansas, Inc a 2007 Best Practices agency in Wichita, Kan. “In today’s market place our clients expect and deserve 24-7 customer service. Our Web site assists us in this endeavor. It also allows us to extend customized insurance functionality to our customers,”
Rich Aniello, owner of Aniello Insurance, a Best Practices agency in Las Vegas, notes agents need Web sites for exposure and that both carriers and customers expect them. “. “If you do not have a Web site you will give the impression that you are not a serious player,” he says. “The Web site gives you credibility. We do not transact business over the Web site because of the nature of our business, but you need to have one.”
Agencies are also relying heavily on technology when it comes to scanning and document management. More than 70% of agencies are using one or both to lighten the paper load.
“We have been using imaging software since May, 1999, although not through our agency management system. I would never go back. We kept the paper for several years, but we don't anymore --- with the exception of original applications, signed documents, etc.,” says Susan Leslie owner of Bragdon Insurance, Inc., a 2007 Best Practices agency in York, Maine. “We are giving serious thoughts of stopping that paper also; it really isn't necessary.”
As technology’s role in the independent agent systems continues to grow, so does the dollar amount an agency invests in technology. On average, an agency spends between 1.7 and 2.7% of its annual budget on technology-related expenses, according to the Best Practices study.
Leslie, who also acts as the agency’s IT person, is surprised by agencies hesitant to make technology investments.
“It amazes me that agency principals are reluctant to invest in technology. It is a lot less expensive than employees. We are a small agency, less than $1million in agency revenues with seven employees, including one producer. We don’t have any assistants. We consider our agency management system the assistants,” she says. “I can sometimes bemoan our current technology because if it can’t be done within the insurance company’s systems, it isn’t available. There is almost no such thing as a manuscript endorsement anymore, which is unfortunate. That said, it has allowed my small office to grow and be very profitable.”
While staying on the cusp of technology has its benefits, being a technology trendsetter isn’t necessarily at the top of all agencies’ list.
“We try to stay on the leading edge, but not the bleeding edge as I am told that pioneers get arrows,” says Steve Minard, CEO of Minard-Ames Insurance Group in Phoenix, Ariz. “We believe that to give fast, accurate, and efficient service, our technology tools are a requirement for today’s marketplace.”
Editor’s Note: This is the third part in a month-long series highlighting the findings of the 2007 Best Practices Study. To read the first installment of the series, click here. To read the second installment, click here.
For more information on the Best Practices study or to order a copy, click here.
Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.
Producer Compensation Issue Update
Producer Compensation Settlement for Travelers
Insurer resolves claims of bid rigging and price fixing.
On the last day of 2007, Travelers settled claims of bid rigging and price fixing arising from arrangements between Travelers and brokers, including Marsh & McLennan, that were alleged to have violated various laws involving the sale of commercial insurance policies. The settlement provides $6 million to the Attorneys General of Florida, Hawaii, Maryland, Michigan, Oregon, Texas, West Virginia, the Commonwealths of Massachusetts and Pennsylvania, the District of Columbia, and Florida’s chief financial officer as well as its Office of Insurance Regulation. The funds are to be divided amongst them as they see fit. Travelers expressly denied having broken any federal or state laws, but indicated that it was settling the claims to “avoid the uncertainty and expense of protracted litigation.”
In the settlement, Travelers agreed not to knowingly offer or provide any “false, fictitious, inflated, artificial, “B,” alternative, back-up or throw-away bid, quote or indication … that is not based upon bona fide business, actuarial or underwriting considerations when the quote or indication is given.”
Travelers also agreed not to allocate customers or markets, rig quotes or bids, fix or stabilize prices or do anything else in violation of the federal or state antitrust laws, unfair insurance practices laws, or any other insurance laws or regulations.
Travelers also agreed to provide a written notice of disclosure of compensation for new and renewal commercial insurance policies starting Jan. 31 and for applications and binders within 18 months after that. It also must make a Web site disclosure concerning commercial policies that includes: 1) a narrative describing the forms of compensation it pays producers; 2) a description of base compensation and supplemental compensation it pays, the range of those payments for the preceding calendar year and the factors considered in determining the range of those payments; 3) a description of contingent compensation it pays, the range of those payments for the preceding calendar year and the factors considered in determining the range of those payments; 4) any equity interest the company has in a producer (other than less than 10% of a publicly traded company); and 5) a toll-free telephone number and email address to use to get more information. Travelers also agreed to make available to its appointed producers a hard copy of the Web site disclosure.
The settlement also requires Travelers to implement a compliance program, including maintaining a compliance office that reports to the general counsel or CEO. The compliance office is to be sufficiently funded and staffed to reasonably assure compliance with the obligations in the settlement, and is to provide, among other things, a training program emphasizing the culture of compliance with the laws and detection of criminal/inappropriate conduct.
And, as part of the settlement, Travelers is to continue cooperating with the settling states and regulators. The obligations of the settlement remain in place from Jan. 1, 2008 through Dec. 31, 2017, after which they expire and are no longer enforceable.
In a press release issued by the Florida attorney general, Florida Insurance Commissioner Kevin McCarty stated: “This settlement continues Florida’s progress toward establishing a national standard for transparency in insurance transactions and reinforces our commitment to protecting Florida consumers.”
Travelers issued a notice to its agents and brokers stating that it will modify its proprietary commercial lines application forms, quotes and proposals over the next 18 months to refer to its compensation disclosure Web site and toll-free telephone number. The company also pointed out that “the resolution of these issues places no obligations on you, our agents and brokers, and has no impact on your compensation.”
For more information about producer compensation issues and to view the settlement agreement and press releases, log in as a member to www.independentagent.com, go to Legal Advocacy and select IIABA/Industry Information and News or contact Debra Perkins, general counsel at800-221-7917; debra.perkins@iiaba.net.
Kathleen Graber (kathleen.graber@iiaba.net) is Big “I” associate general counsel.
On the Hill
Big “I” Hails Signing of Terrorism Insurance Bill
Bush signs TRIA into law.
Last week, President Bush signed into law H.R. 2761, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), which extends the federal terrorism insurance program that was set to expire at the end of 2007.
This legislation extends the federal backstop for an additional seven years under similar terms as the current program. In addition, it modifies the definition of terrorism to include domestic acts of terror, and requires ongoing reports to Congress on inclusion of coverage for group life and nuclear, biological, chemical and radiological (NBCR) events.
“We are enormously pleased that the President has signed into law this long-term extension of the terrorism insurance program. The continuation of this program was a top priority for our members because it allows terrorism coverage to remain available and affordable and brings certainty to policyholders, insurers, and the insurance market as a whole,” says Big “I” President & CEO Bob Rusbuldt. “This extension makes it possible for insurers to provide needed coverage for the business customers of independent agents and brokers and for our nation’s economic security.”
“This extension strikes an effective balance,” says Jason Spence, Big “I” assistant vice president for federal government affairs. “It establishes a long-term extension necessary to foster certainty for policyholders while continuing to encourage increased private market capacity.”
“We thank the President, as well as both the House and Senate, for supporting this crucial program and for recognizing the need to pass an extension before the program’s expiration,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We are especially grateful to Chairman Frank and Ranking Member Bachus in the House and Chairman Dodd and Ranking Member Shelby in the Senate --- without their many months of hard work, this vital piece of legislation would not haven been possible.”
Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of government affairs.
 VIEW: P&C Trends
Flooded Out
Are captive/direct writers edging out independent agents in the flood race?.
In a seesaw battle, it appears independent agents clearly slipped in 2006 in the rankings for flood insurance distribution. We won’t know what occurred in 2007 until well into 2008, but looking at 2006 data, growth in independent agents’ distribution of flood insurance fell behind the pace set by other distribution channels. While some argue agents have distinct advantages over other flood insurance distribution strategies, it appears those advantages were outweighed starting in 2005 and the gap was exacerbated in 2006. The exact reasons are unknown, but it is likely captive/direct writers used their greater personal lines customer-base and increased attention to flood insurance in general to reverse the independent agents’ 2002-2005 growth trend.
The A.M. Best Company has a custom dataset on carriers writing flood insurance in the United States from 2002-2006, broken out by policy issuing insurer, that contains data on the writing carrier’s predominant distribution strategy. One interesting observation--- while agent writers were gaining ground on captive/direct writers in 2002 to 2004, 2005 marked a slowdown of growth and 2006 saw a clear reversal of fortunes with captive/direct writers growing the most quickly. This can be seen in the graph below by looking at the top 10 writers and independent agents (blue line) gaining ground on the captive/direct writers (green line) from 2002-2004, but that changed in 2005 and became more pronounced in 2006. The blue and green bars bring this out with more precision as they show the actual percentage change in direct written premium from the prior year to the current year.
*Source: A.M. Best Company Aggregates & Averages Database
All is not gloomy for independent agents and flood insurance, however, as growth is still growth. Moreover, experts are bullish on independent agents as a distribution strategy for flood insurance.
"We are very confident independent agents are the best channel, long-term, for flood insurance distribution, regardless of the short-term results vis-à-vis the competition,” says Linda Mackey, manager of IIABA’s flood insurance program. “Independent agents are about advice, service, trust and access to a choice of markets. When it comes to assessing flood risks and finding the right coverage through the National Flood Insurance Program or a combination of NFIP and private market solutions, independent agents find themselves doing what they do best, while others find their cookie-cutter delivery channels strained.”
“Plus, you can readily see from industry data that individual independent agent companies are doing very well and perhaps most importantly the overall market is growing,” she says.
Mackey urges all independent agents to take note and investigate the opportunities flood sales offer. The A.M. Best data on individual companies clearly shows healthy growth across many writers with some independent agent writers doing very well in the top 10. Independent agent-focused insurers are aggressively pursing this business with four of the top five insurers emphasizing the independent agent channel via directly appointed agents or a general agency/sub-agent approach.
*Source: A.M. Best Database. The individual insurer groups above are sorted by percent growth from 2005 to 2006 and growth rates. Types of distribution: A=Independent agency or managing general agency, E=Captive or exclusive agents and D=Director or alternative distribution.
Agents not yet active in flood insurance should take note of independent agent-friendly writers in the top 10, as the list includes not only very familiar names but all are actively seeking expanded agency distribution.
Editor’s note: This is part two of a two-part series on flood insurance. To read the first installment, click here.
Paul Buse (paul.buse@iiaba.net) is president of Big “I” AdvantageSM and a licensed p-c agent. For information on Big “I” national and state flood coverage, go to www.independentagent.com.
For agents interested in association sanctioned flood insurance providers, IIABA and 47 affiliated state associations endorse or co-endorse Selective Insurance Group, four states endorse Hartford, one state endorses Travelers and one state endorses Old Dominion (Old Dominion is not in the top 10). For more information on the Selective endorsed program, go to www.independentagent.com/flood. Quotes can be accessed by registered agents on-line at www.bigimarkets.com. Information on other endorsed providers is also available on most state association Web sites and virtually every carriers actively pursuing flood business via independent agents can be easily identified through information posted on their Internet sites.
VIEW: L&H Trends
Career Opportunities to Bank On
Lucrative jobs are plentiful at independent insurance agencies.
At a recent holiday party I found myself in a circle of three young people, all fairly recent law school graduates, catching up about their careers and their workload. As they were describing their typical work week, I was struck by the number of hours they are working. In one case, one of the attorneys mentioned she has been averaging four hours of sleep a night for the last two weeks and working 16-hour days.
I inquired if they had worked prior to going to law school and they all had. Each person said they had been in careers that wouldn’t provide the financial and professional opportunities they were seeking. As a result, they went to law school and are now building a career. I also asked them if it was a love of the law, righting wrongs, fighting injustice or a related objective that motivated them to go to law school. Instead, their collective answer was that being an attorney has its interesting moments, but more importantly they were seeking a career option that would provide an avenue to grow their earnings and opportunities.
This is probably true for many people who end up in careers that might not be interesting to them provide financial rewards they were seeking. However, it is interesting that financially-motivated people consider careers in investment banking, law, medicine, IT but overlook insurance --- and more specifically the independent insurance agency.
Perhaps the first misconception --- fueled by media embellishment and lampoons of insurance agents --- is that basically all jobs in insurance involve sales. While being an insurance producer can be a very well-paying career for those who succeed, the reality is there are a number of agency positions in marketing, accounting, underwriting, IT and customer service that match the capabilities and interests of a large swath of the population. But, despite being in the age of instant information, there is a chasm between what an insurance career is and what young people think it is.
Returning to the example of the three young attorneys, if they put the same drive and energy --- and they wouldn’t necessarily have to work 16-hour days --- into an insurance career and supplement their on the job experience by taking ACSR or CPCU classes, networking and other activities, they will find they have outstanding career prospects. And, according to the Bureau of Labor Statistics, as the baby boomers begin to reach retirement age, there will be a significant brain drain out of the insurance industry. This will create great opportunities for rapid career advancement for people committed to the industry. Another significant advantage that ties to trends is that independent insurance agencies are located in virtually every town in the country and this allows people to select a location that fits their quality of life goal, whether it’s urban, suburban or rural.
The best way to help correct the perception is for independent insurance agents to let young people know how rewarding the career can be. Also, encourage parents to explain to their college-age kids that insurance is a viable employment option. Help correct the public perception and lack of knowledge about independent insurance agents, and increase the ranks of the independent insurance agency system at the same time.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
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