T H U R S D A Y ,  J A N U A R Y   4,  2 0 0 7 

Big “I” National News

P&C Trends

A Look Ahead

Forecasts predict profitable, but more muted 2007.

2007 may not live up to the record-high returns and exceptional earnings seen in 2006, but the outlook for the p-c industry is favorable, according to many industry forecasters and analysts, who are predicting stability in the upcoming year.

Unusually low natural catastrophe losses in 2006 gave the industry a chance to recover after sustaining record losses in 2004 and 2005. Unfortunately, the industry’s strength in 2006 was atypical --- a result of a quiet hurricane season combined with the lift from runoff of hard market premiums and benign loss trends --- and it is unlikely these circumstances will occur simultaneously again in 2007.

The industry saw its highest returns in more than 30 years in 2006, with a projected 15% return on equity and investment yield of 4.9%, according to Swiss RE’s Americas p-c unit. It also saw its third lowest third quarter in the past 10 years with only $971 million in property losses, according to the Insurance Services Office’s Property Claim Services Office unit. The Insurance Information Institute’s annual Early-Bird Forecast 2007 indicates that low catastrophe losses last year combined with a strong performance in virtually all other major lines of p-c insurance, will likely propel the industry to its best underwriting performance in 51 years for 2006. Analysts expect this trend to continue into 2007, but with a bit more muted underwriting profit.

The average forecast for 2007 calls for an increase in net written premiums of 1.5%, which is a drop from the 2.8% estimated for 2006. The increase in premiums would be the second lowest rate of growth for p-c insurers since 1998 --- the last time the market was soft.

“The deceleration in premium growth in 2007 is a direct result of a virtual across-the-board softening in the personal and commercial lines pricing environment, the sole major exception being hurricane-exposed coastal property insurance coverages, as insures look to charge premiums that are commensurate with substantial risk assume,” the III forecast says.

To some insurers, the 2007 forecast mirrors that of the soft market in the late 1990’s, when the industry saw a growth rate of 2.9% in 1997 and 1.8% in 1998. This concerns some because following those strong growth rates were a few rough years for the industry as combined ratios rose from 102 in 1997 to almost 116 in 2001. However, the expected combined ratio for 2007 is 97.6 and thus far the industry seems to be in the clear, according to the III. The combined ratio for 2006 was an estimated 94.3, which, if found accurate, would be the best underwriting performance the industry has seen since 1955 when the combined ratio was 94.9.

Also worth noting is that premium growth in 2006 will come in well below the average analysts’ expectations from a year ago. In last year’s Early Bird survey the consensus estimate was for net written premium growth of 4.7%, according to the III forecast.

Steady price declines across most lines in 2006 are expected to continue, but could slowly erode profit margins over the next year. The impact from these declines will likely not be felt in sector earnings until 2008, according to Standard & Poor’s U.S. Commercial Lines 2007 Outlook.

“Overall we believe the most serious threat to the commercial lines sector is the potential for a return to more competitive pricing,” says John Iten, credit analyst at Standard & Poor. “The shocking storm losses in 2005 temporarily slowed the price deterioration then underway in both property and casualty lines. Since the, casualty rates have continued to decline, while commercial property rates have strengthened somewhat.”

Despite 2006’s calm storm season, exposure to catastrophic loss remains a huge concern within the industry and some are warning that the worst is yet to come.

“With rapid coastal development $40 billion-plus storms are expected to become more common and most in the industry expect a $100 billion CAT year is coming soon,” says the III report.

A long-range forecast, issued by London-based forecaster Tropical Storm Risk, predicts an above-average Atlantic hurricane season with a strong probability that 16 tropical storms are likely to occur in the Atlantic, five of which are likely to hit the United States --- two as hurricanes. An average season has nine named storms. The forecast is attributed to predictions that the 2007 trade winds, which blow westward from the Atlantic and Caribbean Sea, will be weaker than usual and water temperatures between west Africa and the Caribbean will be warmer than average.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor. 

2006 in Review

Producer Compensation Remains Heated Issue

Compensation issues, contingent commission throw industry for loop in 2006.

From carrier settlements to then-New York Attorney General Eliot Spitzer’s decision regarding the 65% tipping test having been met, 2006 was a rollercoaster ride for the producer compensation issue.

Insurance News & Views takes a look back at some key events concerning this issue in 2006.

When Spitzer filed a lawsuit against Marsh & McLennan Co. charging it with fraud and antitrust law violations in 2004, he set off a chain reaction of lawsuits, allegations and new compensation and disclosure policies. Since then, the insurance industry has been reeling as the producer compensation has continued to unfold.

AIG’s settlement kicked off 2006.  In February 2006, AIG entered into settlements with the New York attorney general, the New York Insurance Department, the Securities and Exchange Commission, and the U.S. Department of Justice.  In the settlements, AIG agreed to pay more than $1.6 million in restitution.  The company also agreed to support legislation banning contingent compensation. Importantly to agents and brokers, AIG agreed to stop paying contingent commissions in excess casualty lines through 2008, and agreed to stop paying contingent commissions in any insurance line in the United States where a so called “65% tipping test” is met.

The 65% tipping test provides that if more than 65% of national gross written premium is written by 1) insurers that do not pay contingent compensation, and 2) insurers that have signed settlement agreements with a 65% test, then the carriers with those agreements must stop paying contingent compensation in the next calendar year, once notified by the attorney general.

The AIG settlements were followed in March 2006 by Zurich entering into two agreements related to investigations involving its producer compensation and insurance placement practices. One agreement was between Zurich and the principal insurance regulator of each state that adopted it, and the other agreement was with state attorneys general from California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas, Virginia and West Virginia (sometimes called the Multi-State Agreement). Later in the month, Zurich entered into another settlement, this time with the attorneys general of New York, Connecticut, and Illinois (sometimes referred to as the Three State Agreement) to resolve their investigations about the company’s placement and servicing of insurance. The Multi-State Agreement called for Zurich to require its agents to make written compensation disclosures to customers on a company provided form.  Like the AIG settlement before it, the settlement with New York, Connecticut, and Illinois contains a prohibition on the payment of contingent commissions in insurance lines where the 65% test is met, and included the commitment of the company to support legislation banning contingent commissions.

Also in March, Marsh’s legal woes continued when the state of Florida sued Marsh for alleged abuses in its use of placement service agreements.  Florida elected to sue Marsh instead of participating in the settlement reached by the company with the New York attorney general that allowed for nationwide resolution of the compensation disclosure issue.

On May 5, Spitzer and Connecticut Attorney General Richard Blumenthal filed suit against Liberty Mutual alleging that it unlawfully paid contingent commissions to producers to steer business to the company. That lawsuit is still pending.  In a statement in response to the filing of the complaint, Liberty Mutual described the settlement demands of New York and Connecticut as "excessive and unreasonable: both in terms of magnitude and in their demands that we change legitimate business practices in states outside their jurisdictions." Liberty Mutual concluded the statement by indicating that "it is in the best interest of our policyholders and employees that we vigorously defend these allegations and allow the judicial process to work."

And, on May 10, 2006, The Harford entered into a settlement with Spitzer and Blumenthal to settle charges of fraudulent business practices and unjust enrichment concerning its compensation relating to terminal/maturity funding group annuity pensions.  The company also agreed in that settlement to support legislation banning contingent compensation.

In June, Spitzer continued focusing his attention to compensation involving retirement products. The New York State United Teachers settled with Spitzer for alleged abuses in the federation of unions’ 403(b) retirement plan with ING Life Insurance and its predecessor Aetna Life Insurance and Annuity Company.  The settlement provided for more transparency between retirement plans and plan participants regarding the compensation arrangement between the plan provider and the federation.  ING would later settle with Spitzer in October 2006 for the same alleged misconduct.

Illinois’ attorney general filed its own lawsuit against Liberty Mutual and seven of its affiliates in July, alleging that the company participated in bid-rigging and steering. That lawsuit is still pending.  In response, Liberty Mutual vowed to fight the allegations and said that allegations of wrongdoing regarding commission payments and reinsurance brokering are incorrect and that Liberty Mutual’s legitimate and standing industry practices were appropriate and lawful.

Also in July, a federal judge in Connecticut dismissed a lawsuit brought by shareholders against The Hartford accusing the company of concealing payments of contingent commission and participating in bid-rigging schemes.

St. Paul Travelers, Inc. and its subsidiaries announced their settlement with the New York, Connecticut, and Illinois state attorneys general in August, resolving their investigations of the company’s contingent compensation practices.  The St. Paul Travelers settlement requires the company to stop paying contingent commissions in insurance lines where the 65% tipping test is met, and contained the company commitment to support legislation banning the payment of contingent commissions.

In September, the Big “I” filed an amicus curiae (friend of the court) brief in federal District Court in New Jersey expressing concern over certain terms of the proposed settlement agreement involving Zurich. The Big “I” filed this brief after various state attorneys general intervened in the lawsuit for the purpose of asking the court to enter an order incorporating various provisions they had agreed to with Zurich in a March 2006 Multi-state Agreement, including non-monetary terms. The brief explained that one of those terms, the mandatory disclosure form being required by Zurich of its producers, would impose an unfair burden on agents and brokers and would interfere with their customer relationships. The brief affirmed that the Big "I" supports transparency in insurance transactions and explained that Zurich should be responsible for making its own disclosures to its customers. Opposition to the Big “I” brief was filed by Zurich, the plaintiffs in the lawsuit, and the attorneys general who entered into the Multi-state Agreement with Zurich. While they argued that the Big “I” brief was filed prematurely, they did not question the credentials of the Big “I” to advise the court on the significant impact that the proposed Zurich settlement will have on agents and brokers. The Big “I” filed a reply brief to that opposition, explaining the reasons why the brief was timely and appropriately filed.

In October, Spitzer filed a lawsuit against Coventry First, LLC, claiming it defrauded owners of life insurance policies by rigging bids and making secret commission payments in connection with life settlements. The lawsuit against Coventry alleges that it made secret payments called co-brokering fees to life settlement brokers and, in exchange, the brokers suppressed bids from life settlement companies other than Coventry.  This lawsuit is still pending.

In late October, Zurich entered into a settlement agreement with the Office of the Attorney General for Ohio and the Ohio Department of Insurance to resolve their allegations that Zurich engaged in allocating or dividing customers or territories for insurance and insurance services; fixing, controlling or maintaining prices, rates, quotations or fees for insurance; and falsifying quotes at the request of brokers to facilitate steering, in violation of the Ohio antitrust law.

On Nov. 1, Spitzer announced an agreement with UnumProvident (Unum), the nation’s largest disability insurer, settling allegations of deceptive conduct relative to the compensation practices it used with brokers and consultants selling its group insurance products. The settlement required Unum to pay $1.9 million to the state of New York as a civil penalty and to pay $15.5 million into a fund for policyholders who were represented by producers who received contingent compensation.  Instead of containing the 65% test, the UnumProvident settlement bans the payment of contingent compensation.  Also, unlike earlier settlements by Spitzer’s office with other carriers, the UnumProvident settlement did not require the company to support legislation banning contingent commissions.

In early November, at the hearing in federal District Court in New Jersey on the proposed terms of Zurich’s settlement (in which IIABA filed an amicus curiae brief), a representative of the attorneys general informed the Court that the attorneys general would seek the court’s approval only of the monetary terms of the proposed Zurich settlement and not the non-monetary terms, including the provision requiring agents use Zurich’s mandatory disclosure form.  Two days later, the Court issued an order that granted preliminarily approval of the monetary terms of the proposed settlement between Zurich and the class plaintiffs in the litigation. The settlement class includes all individuals or entities who, from August 26, 1994 through September 1, 2005, engaged the services of a broker in connection with the purchase of an insurance policy from Zurich. The settlement class does not include any person or entity which opts out of the proposed settlement, has already settled with Zurich or elects to receive money under the Three State Agreement that Zurich reached with New York, Connecticut and Illinois back in March. The order also established that the notice to the settlement class of the proposed settlement had to be sent out by December 12th and any opt-outs or objections must be postmarked by Jan. 11, 2007.  The order set January 26, 2007 as the date for the fairness hearing on the proposed settlement. It is at the fairness hearing that the court will consider whether the proposed settlement should be approved as fair, reasonable, and adequate, and if Zurich should be dismissed permanently from the lawsuit.

Also in November, Spitzer, now the governor of New York, gave the insurance industry a parting gift by barring four carriers from paying contingent commissions. By notifying St. Paul Travelers, Zurich, AIG, and ACE that the 65% test has been met for personal lines auto, homeowners, boiler & machinery and financial guaranty coverage, the carriers were prohibited from paying contingent compensation to agents for business placed in those lines starting Jan. 1, 2007. On the same day, attorneys general of Illinois and Connecticut also notified St. Paul Travelers, Zurich and ACE that they could not pay contingent compensation to agents for the same lines covered by Spitzer’s notice because they also believe the 65% tipping test was met.  The ban affects only those carriers as they are the ones that entered into agreements with the 65% test.

On Dec. 4, Texas Attorney General Greg Abbott announced that Texas and nine other states finalized their settlement with Zurich. The other states include California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Virginia and West Virginia. The action finalized the Multi State agreement that Zurich reached with these states in March 2006. This action by Texas and the other nine states was a companion to the settlement of the class action in New Jersey under which Zurich is required to pay policyholders nationwide of $121,800,000 (with a possible additional $29,900,000) as well as the regulatory settlement endorsed by the National Association of Insurance Commissioners.

A flurry of activity occurred in December before 2006 came to a close.  Six companies garnered attention due to the producer compensation controversy.  Prudential Insurance Company settled with New York’s attorney general and California’s Department of Insurance.  The New York settlement prohibits Prudential from paying any contingent compensation on group life, disability, long term care, accidental death and dismemberment, and medical stop loss insurance.  Prudential must also disclose how it pays independent agents and brokers to all clients and prospective clients.  That settlement does not contain any requirement for Prudential to support legislation banning contingent compensation.  Acordia was sued by New York, Connecticut, and Illinois for steering due to allegedly undisclosed contingent compensation.  This is in addition to the pending lawsuit against the company filed by the attorney general of West Virginia.  Chubb settled with the New York, Connecticut, and Illinois attorneys general, and agreed to ban the payment of contingent compensation for all policies placed after December 31, 2006.  This ban is not triggered by the 65% tipping test agreed to by AIG, ACE, Zurich and St. Paul Travelers.  Following the announcement of the settlement, Chubb stated that it would change its compensation structure to provide for supplemental compensation, which is permitted, rather than contingent compensation, which is not.  The Chubb settlement, unlike Prudential’s settlement, requires the company to support legislation banning contingent compensation.  St. Paul Travelers decided to give its producers an opportunity to participate in an optional fixed commission program for commercial lines eligible for profit sharing but not covered by the notice from the attorneys general of New York, Connecticut and Illinois that the 65% test has been met.  Arthur J. Gallagher became the second company to settle out of the class action lawsuit pending in New Jersey.  Following Zurich’s lead, Gallagher will seek court approval of its nearly $37 million settlement to end its involvement in that litigation.  Last, MetLife settled with the New York attorney general on the last business day of the year.  Like the Prudential and Chubb settlements, the MetLife settlement prohibits the payment of contingent commissions without regard to the 65% tipping test found in settlements earlier in the year.  The MetLife settlement does not require the company to support legislation banning contingent compensation.

In 2007, the Big “I” will continue to advocate aggressively on this issue to preserve a business environment for agents and brokers that fosters growth and success.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.



Producer Compensation Issue Update
Times are Changing

Chubb, Travelers announce changes to incentive compensation.

Bob Dylan’s 1964 hit “The Times They Are a Changin’” has new relevance as a new year begins. In the short span of one year, the industry went from using contingent compensation as a common way to reward independent agents and brokers for sales, to having some carriers voluntarily enter into settlement agreements prohibiting the use of contingent compensation for lines in which more than 65% of national gross written premium is written by insurers that do not pay contingent compensation, to having a few other carriers enter into voluntary settlement agreements prohibiting the use of contingent compensation in any circumstance.

So, what’s next? Will other carriers discontinue the use of contingent compensation?  And if so, will they replace it with something else? Will there be more settlements relating to producer compensation involving other carriers and will they include outright bans on the use of contingent compensation? What will happen in the pending lawsuits against those unwilling to enter into settlements that ban a perfectly legal form of compensation, and will new lawsuits be filed against others? How will carriers not directly embroiled in the producer compensation issue respond to the changing landscape? These are just a few of the questions that only the future will answer.

Two carriers have recently announced changes to the structure of their incentive compensation, St. Paul Travelers and Chubb. Each is in the process of communicating about those changes with their respective appointed agents.

St. Paul Travelers
In summary, St. Paul Travelers’ settlement in August 2006 with the New York, Connecticut and Illinois state attorneys general resolved their investigations of the company’s contingent compensation practices and required the company to stop paying contingent commissions in lines where the 65% tipping test is met.

Following the settlement, Jay Fishman, St. Paul Travelers chairman and CEO, told IIABA the company “will pay competitive compensation, regardless of tipping rules or legislative changes.” He added that even if the 65% test is met, “there are appropriate ways to provide competitive compensation that differentiates for the performance of the producers’ business that are not inconsistent with the [settlement] agreements.”

Then, when the company was notified in November 2006 by the attorneys general of New York, Connecticut and Illinois that the 65% tipping test was met for certain lines, Fishman advised agents that the company would pay a fixed amount to agents on those affected lines in the same time frame as contingent compensation currently is paid, with the fixed amount communicated to each agency by the end of the first quarter of 2007, but effective Jan. 1.

Fishman told agents that “in total, we intend for personal lines compensation in 2007 to be at least equal to 2006 total compensation.” He noted that the new plan is not a promise to pay “every agency the exact same amount or rate as they received in 2006,” but that the company believes “most of our agencies will receive a total compensation rate that is substantially the same” as in 2006 while differentiating for business performance. Fishman committed that “no matter what you’ve heard or believe, we will continue to offer compensation that is competitive, predictable, differentiates your agency based on the performance of your business and complies with our legal obligations.”

In late December 2006, the company notified its agents that, for 2007, it would offer agents an option of receiving a fixed, performance-based supplemental commission for commercial lines eligible for profit sharing. Fishman told IIABA that “we believe this program is a thoughtful approach to a complex issue and we will advocate for it with our agents. We expect all of our agents will move to a purely fixed commission program by Jan. 1, 2008. We believe they will do so because once our producers understand the program, they will increasingly demand it. This compensation structure keeps them whole economically, offers increased predictability and responds to the regulatory concerns which continue to be strongly expressed both at the insurer and the agent and broker levels. However, we have made no decision for 2008 at this time."

Chubb
In late December 2006, Chubb announced concurrently that that it entered into a settlement with the attorneys general of New York, Connecticut and Illinois relating to their investigations of its producer compensation practices and that it would implement a guaranteed supplemental compensation (GSC) program starting in 2007 as it eliminates contingent compensation.

Tom Motamed, vice chairman and chief operating officer of Chubb, informed the company’s agents that it would “develop your GSC percentage for 2007 based on your past performance and results with Chubb” and that each agency would be provided with its GSC for eligible business placed with Chubb in 2007 with the payment made by the company in mid-January for 2006 earned contingent commission. Motamed committed to inform agents by March 31, 2007 of their new GSC percentage for 2008 eligible business.

Motamed added that “assuming continued successful performance by Chubb’s producers, we expect the total additional commissions paid under the new GSC program to be substantially equivalent to the amounts awarded under the former contingent commission program.”

The Bottom Line for Agents
For agents and brokers, the playing field is different than was the case one year ago with at least two carriers. The incentive compensation of the past based on a formula applied to business written in that year is gone for Chubb on all lines and is gone for St. Paul Travelers on personal lines with an option for producers to eliminate it for commercial lines. In its place, those companies each announced programs that pay supplemental compensation based on an agency’s past performance with promises that the payments will be substantially the same as amounts awarded under their respective prior programs.

Only time will tell if other settlements will ban all contingent commission payments and if other carriers will follow the lead of St. Paul Travelers and Chubb by implementing new incentive compensation models that are based on past performance.

What will remain unchanged is IIABA’s commitment to advocate aggressively on this issue in every forum possible to preserve what is important to members for a business environment that fosters their growth and success.

For more information, please contact Debra Perkins, IIABA executive vice president and general counsel at 800-221-7917; debra.perkins@iiaba.net.

MetLife Ends 2006 with a Settlement

Like Like Prudential and Chubb before it, MetLife closed out December 2006 by settling with outgoing New York Attorney General Eliot Spitzer. On the last business day of 2006, MetLife announced the settlement resolving allegations of deceptive practices in the sale of group health, dental, life, disability, long term care, accidental death and dismemberment and medical stop loss insurance through the use of contingent commissions, override payments and service fees. Like the recently announced settlement by Chubb, Prudential and UnumProvident, this settlement does not contain a 65% tipping test. MetLife has agreed to cease paying contingent commissions altogether rather than based on the 65% tipping test included in settlements in 2006 with companies such as St. Paul Travelers, Zurich and AIG.

Settlement Terms
The terms of the settlement are nearly identical to the terms contained in the Prudential and Chubb settlements with New York.

Monetary Payments
On or before Jan. 31, 2007, MetLife must pay a $2.5 million penalty to the state of New York and $16.5 million into a fund for policyholders who were represented by independent agents and brokers who received contingent compensation from the company.

Permitted Compensation
As of Jan. 1, 2008, MetLife is only allowed by the settlement to pay permitted compensation to producers. Permitted compensation is defined as: 1) base compensation (percentage or fixed commission for new or renewal business), supplemental compensation (percentage compensation based on some or all premiums for policies in force during the previous year) and service fees (fees for administration in addition to commissions); or 2) other compensation (anything of value, including money, loans, forgiveness of debt, trips, prizes gifts, etc.) that has been “expressly and conspicuously authorized in a separate writing” by a client or prospective client. MetLife can pay permitted compensation, but is not permitted to pay contingent compensation on business covered by the settlement agreement, which are group health, dental, life, disability, long term care, accidental death and dismemberment and medical stop loss insurance.

In the future, if MetLife wants to seek the right to pay contingent commission (rather than permitted compensation), it may do so if one or more other carriers that have signed settlements with the New York attorney general regarding these insurance lines have the right to pay contingent compensation. In this situation, MetLife can request that its settlement be amended to allow it to make contingent commission payments on substantially the same terms and to the same extent as allowed by the other settlements.

The agreement prohibits MetLife from adding supplemental compensation to the cost of insurance policies except as an allocation of overhead expense, though it can still be paid by the company. Any such payments must be fixed prior to the start of the year in which they are payable and the percentage cannot be varied during the year.

MetLife also is prohibited from paying service fees to independent agents and brokers unless the client has agreed in writing, in advance to the payment, amount and services being provided, and the client is informed that the company provides the same services if that is the case.

Compensation Disclosures
Starting on Jan. 1, 2008 MetLife is required to disclose to clients and prospects the compensation it pays independent agents and brokers by providing a compensation notice and compensation statement on forms included in the settlement agreement.

The compensation notice is a generic description of the types of compensation the company pays. It identifies base compensation and how it is calculated and paid; supplemental compensation and how it is calculated and the maximum amount possible, and a Web site address and a toll-free number from which a client or prospective client can get more information about the compensation paid or payable as to their insurance. The compensation notice must be included with a bid, if any. If there is no bid then the company can deliver it prior to the time a prospective client agrees to the proposed policy. The agreement prohibits the company from paying any compensation to the producer before the compensation notice is acknowledged in writing by the client.

The compensation statement is very similar to the compensation notice, but it includes a paragraph referencing the date of any agreement by the client to pay the producer and the amount or percent of premium to be paid. The company is required to provide the compensation statement to the client with the insurance contract and to send it to the client annually, on or before June 30 of each year.

Conduct Restrictions
By Jan. 1, 2008, MetLife is required by the settlement agreement to develop and implement a written producer compensation plan, which is not further defined. The company is also required, by April 1, 2008 , to implement company-wide written standards of conduct regarding compensation paid to producers, including training in business ethics, professional obligations, conflicts of interest, antitrust, trade practices compliance and record-keeping.

Cooperation Obligation
MetLife agreed in the settlement to cooperate with the New York attorney general with regard to the ongoing investigations of the company and the insurance industry. This obligation is consistent with similar obligations in settlements the New York attorney general has entered into with other carriers.

The press release issued by MetLife in response to the settlement announcement contained no details on any future compensation structure it will develop for independent agents and brokers.

Documents
The press releases from the New York attorney general and from MetLife, along with the settlement agreement are posted on the members-only legal advocacy section of www.independentagent.com under IIABA/Industry Information & News.

For more information, please contact Kathleen Graber, associate general counsel at (703) 706-5432;  kathleen.graber@iiaba.net.

On the Hill

Feds Say Flood Reforms Needed

Report praises agents for heroic work following 2005 hurricanes.

A new federal government report praises insurance agents and brokers for performing well under extremely difficult conditions following Hurricanes Katrina and Rita, but also states that institutional reforms are needed at both the state and federal level.

According to the paper released by the Government Accountability Office (GAO), agents deluged with a record number of claims following the catastrophes managed to settle claims promptly despite the myriad of challenges they faced in the wake of the storms. But the report also indicates that only 15 states have adopted minimum education and training requirements for agents who sell flood insurance, and it calls for the Federal Emergency Management Agency (FEMA) to do more thorough work in claims-handling auditing.

“The report tells us exactly what we expected,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. “It correctly lauds the diligent and often heroic work performed by agents and brokers in the field, despite the calamitous conditions they faced. It also tells us that comprehensive legislative reforms are necessary to make the system perform more efficiently and effectively after future disasters.”

The GAO report showed that the FEMA-administered National Flood Insurance Program (NFIP) had paid a record 162,000 flood damage claims resulting from Hurricane Katrina, and an additional 9,000 from Hurricane Rita, as of May 2006. FEMA reported that more than 95% of claims in the Gulf states had been paid by that time.

The unprecedented number of dollars paid out in claims sent the NFIP’s deficit skyrocketing, from approximately $1.5 billion before the hurricanes to about $20.8 billion as of March 2006. The NFIP was forced to borrow the money from the Department of the Treasury, a necessary step the Big “I” took a lead role in advocating. There has been some conflict between the House and the Senate on how to deal with the deficit. The House passed a comprehensive reform bill that included a number of Big “I”-backed provisions, and the Senate Banking Committee produced a differing bill that also included a number of important changes. The issue is likely to be addressed again this year, and the Big “I” will continue to advocate its reform package announced in Nov. 2005. (Click here to see the Big “I” proposal.)

“The report helps to illustrate what IIABA has been advocating since shortly after the storms: the NFIP is an invaluable program to consumers and taxpayers alike, but Congress should consider reforms to make the program more actuarially sound and to increase the coverage available to consumers, such as optional business interruption insurance, additional living expenses and increased maximum coverage limits,” says John Prible, Big “I” assistant vice president for federal government affairs. “We were very supportive of the Senate Banking Committee’s action and the House passage of the Flood Insurance Reform and Modernization (FIRM) Act of 2006 and we look forward to working with leaders of the 110th Congress as they consider the necessary NFIP reforms that will protect the financial solvency of the program.”

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/government relations.

L&H Trends

It’s a New Year and New Regulations Await Life Insurance Agents

Now that the New Year has arrived and the holidays are history, there’s no doubt agents are looking forward to getting some life insurance production on the books. As you prepare to embark on another year of selling, first make sure that you’re up to date on any new compliance regulations.

Take the hypothetical example of Joe Smith, an independent agent who wrote a $500,000 life insurance policy and submitted it to the carrier. He later hears back from the life insurance carrier that it would not accept the application.

“I don’t know if this is another systems meltdown for you guys but I’ve got a check and application and the insured is in great health, so let’s get on with it,” Smith says.

“This is no mistake, Mr. Smith. We can’t accept any new applications from you,” says the carrier representative.

“What are talking about? My license is valid and I’m up to date on my continuing education,” Smith says.

“Mr. Smith we sent you four e-mails and two letters requesting you complete the new federal anti-money laundering (AML) regulations by Dec. 31, 2006 or you would not be able to write any new business with us,” the representative says.

“With all of the compliance stuff that comes across my desk, I didn’t know that I had to actually do something. You should have stamped it very important. And your e-mails probably got caught in my spam filter,” Smith says.

“I’m sorry but all carriers and agents that sell covered life insurance products such as permanent individual life policies and other individual life policies containing cash or investment features such as universal life products have to comply,” the representative says.

“Alright, how can I take the class?” Smith asks.

“I’ll forward you the link to the online class that we are offering,” says the representative.

The moral of the story is that, in the end, compliance is like death and taxes ---it can’t be avoided.

Insurance carriers are required to have procedures in place to prevent the laundering of cash through cash value and cash reserve products. And, while 99.9% of independent agents’ customers are law-abiding citizens, there is always the possibility that someone is trying to evade income taxes or, worse, trying to make money available to finance terrorist activities. As always, insurance agents are the front line of defense and are expected to carry out the identification rules and more importantly be vigilant for product purchases and withdrawals that are unorthodox or suspicious in nature.

Since independent insurance agents represent several carriers, it may be up to the agent to decide which carrier’s class he wants to use to satisfy the requirements. At this juncture, it appears that compliance requirements will come from the carriers and not through the state insurance departments. It is expected that licensing classes will have anti-money laundering information included in the future. And of course, agency principals should make sure all licensed life insurance producers have satisfied the requirements to avoid any future glitches.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.