T H U R S D A Y ,  J A N U A R Y   1 0 ,  2 0 0 8 

Big “I” National News

CFA Director of Insurance J. Robert Hunter outlines his new study during a press conference this morning. 

P&C Trends

CFA Slings Accusations of Overcharging Consumers at P-C Industry
New study blames insurers for anti-consumer practices, says insurance is a “low-risk investment.”

Property-casualty insurance is overpriced and is not a good value for consumers, according to a study released today by the Consumer Federation of America.

CFA Director of Insurance J. Robert Hunter, the author of the study, blames the industry for continuing to “systematically overcharge the consumers and reduce the value of home and auto insurance policies” in 2007.

The study estimates insurer overcharges, over the last four years, amount to an average of $870 per household (approximately $220 annually). Analysts estimate the industry has $100 billion excess capital, but Hunter says it’s closer to $175 to $200 billion.

Hunter, an actuary, former state insurance commissioner and former federal insurance administrator, says insurers’ anti-consumer practices are evident by looking at two measures: loss ratio and profit.

According to the study, loss ratios for p-c lines have declined in the last 28 years and today consumers are receiving 55 cents back in benefits for every premium dollar spent. The CFA also says insurer’s profits in the last four years, coupled with the industry’s claim that it is underperforming, are misleading.

“The insurance industry dramatically understates its return on capital in several ways. For instance, it includes excess capital earned by mutual insurers like State Farm when calculating ROE (return on equity), which makes the actual return look lower than it really is. In reality, the ROE earned by publicly traded insurers is equal to or more than that earned by Fortune 500 companies, while their investment risk is lower than that of those corporations,” the report says.

“The reserves are clearly excessive --- it would take five (Hurricane) Katrinas to bring it down to normal levels,” Hunter says.

The study estimates after-tax returns for 2007 are about $65 billion, slightly less than the levels set in 2006. Combined profits for 2004, 2005, 2006 and 2007 are about $253.1 billion. The loss and loss adjustment expense ratio for last year is estimated at 66.7%, the lowest in the 28 years studied.

Hunter alleges insurers’ claim that high premiums and profits are necessary to compensate for the excessive risks they bear is false. Instead, he believes insurance is a “low-risk investment.” The basis for this belief, her says, is that standard measures of stock market performance that assesses financial safety and stock prices stability.

“If the industry has made itself such a low risk, why should we continue to pay a high cost,” he says.

The Insurance Information Institute (I.I.I) issued a response to the CFA’s study, reconfirming previously reported findings that p-c insurers were profitable in 2006 and 2007, which resulted in stable or lower premium prices for most consumers.

“Today, insurance markets are highly competitive and the majority of U.S. drivers, homeowners and businesses are paying only modestly more in premiums, or in many cases less, for insurance than they were just a few years ago,” said Robert Hartwig, president of the I.I.I. “The major exception to this general trend is hurricane-exposed coastal property insurance coverages, where insurers are seeking to charge premiums commensurate with the substantial risk they assume.”

“The vast majority of the industry’s profits in 2007 will be reinvested back into the business,” Hartwig says. “Profits continue to bolster the industry’s policyholder surplus, a measure of claims paying capacity, providing an additional buffer against the mega-catastrophes that lie ahead.”

To read the CFA’s study, click here.

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

P&C Trends

Industry Expects Declining Performance in 2008
Insurance leaders gathered at III meeting share thoughts on market.

The poll results are in --- and the insurance industry is bracing for a downturn in 2008.

More than 75% of the industry leaders gathered at the Insurance Information Institute’s Property-Casualty Insurance Joint Industry Forum earlier this week expect a decrease in profitability in auto, homeowners, commercial lines and workers’ comp in 2008. More than 92% predicted an increase in the industry’s combined ratio in 2008, while 62% expected flat premium growth and 34% expected a premium decrease.

Participants on III CEO Panel discussed predictions for 2008 and shared their thoughts on industry performance, natural disasters and other topics. Panel participants included Evan Greenberg, Chairman, President & CEO, ACE Unlimited; Thomas Wilson, President & CEO, The Allstate Corporation; Ramani Ayer, Chairman & CEO, The Hartford; Anthony Kuczinski, CEO, Munich Re America and Gerald Schmidt, President & CEO, Mutual of Enumclaw. Frank Nutter, President, Reinsurance Association of America, moderated the panel.

Nutter noted that while 2008 industry performance predictions were more dire, 2007 had produced an underwriting profit resulting in one of the top 12 combined ratios since 1920.

“Everything came together in 2007,” Greenberg said. “This year will bring rapidly accelerating rate deterioration.”

Wilson commented that personal lines, especially auto insurance, are different than commercial lines because investing in marketing, service and product innovation varies the value of the product to consumers.

“We’ve found consumers are prepared to pay for better products…if you play the same game selling the same thing, your rates will go down,” he said.

Where is the industry in the current cycle? Ayer commented that in previous cycles, reinsurance availability tended to drive the market softening.

“In today’s market, reinsurers are more disciplined in their price moderation,” he said. “We have a cyclical business. The question of whether this cycle will have the depth of other cycles remains to be seen.”

Schmidt noted that changes in the corporate boardroom culture since the last cycle shift could be an X factor in how this cycle plays out.

“There is much more of a boardroom discipline than in previous cycles,” he said. “Companies need to be prepared for having their feet held to the fire for results more than ever before.”

With the Dow down more than 230 points during the discussion on Tuesday, the panelists also debated the effects of a possible recession on the industry.

“Certainly the probability of a recession is higher now than it used to be,” Ayer said. “I think it’s more likely we’ll have low growth rather than a recession. But if we would enter a prolonged recession, it could have repercussions on the asset side, claims frequency and in fraud.”

And what about the dreaded economic buzzword of the day: subprime?

“You’ll see leakage from subprime into other industries,” Wilson said. Ayer agreed, noting the effect on D&O and E&O claims.

“You can’t have $150 billion go through the system without litigation—it’s just too premature to know the verdict now,” he said.

Katie Butler (katie.butler@iiaba.net) is Independent Agent magazine editor-in-chief. 

VIEW: P&C Trends

Two Paths to Premium Growth: Advertising and Commissions
A comparison between GEICO and Chubb’s advertising strategies.

On Jan. 4, GEICO launched a new advertising campaign, again highlighting its lizard mascot. Among its new ads is a traveling exhibit of live geckos in conjunction with the Association of Zoos and Aquariums. This is just the most recent example of the growth strategy used by GEICO and other direct writers: massive advertising means more premium dollars on the income statement.

Every time GEICO makes a splash with an advertising campaign, many agents end up fielding questions from customers and family members about why the insurers they use do not have similarly well-recognized advertising campaigns. The answer basically is one of strategy: dollars. The chart below is an excellent example of the approach typically used by insurers dedicated to independent agents versus that used by GEICO. Chubb Insurance Group is used in the graph as an excellent example of an independent agency company, but almost any similar insurer would show the same scenario.



*Source: A.M. Best Aggregates & Averages. Premiums for GEICO were those shown under personal and non-standard automobile insurance and GEICO’s three writing insurers on those lines. Chubb premiums and commissions are those for the entire Chubb group covering all p-c lines they write.

Three things are readily apparent from the graph. First, Chubb emphasizes the fact that independent agents have a commission expense of about 12-13% annually (red line “X”). While not shown in the above chart, this is contrasted with the same figure for GEICO of about a half percent. Second, you can see that GEICO spends up to 5% of its premium dollars on advertising expenses (red line “□”). Contrastly, Chubb spends less than half a percent of premiums on advertising. Finally, the graph shows that both companies have grown in premiums over the last nine years (green lines).

“The peak in GEICO’s advertising expenditure in 2000 came with the full implementation of Warren Buffet ownership of GEICO and there was a dramatic increase in direct marketing, which coincides with the launch of their gecko campaign,” explained Dave Evans, IIABA’s Executive Director of Trusted Choice.  GEICO is an interesting juxtaposition to a great agent company like Chubb and how they choose to do business. “For my money, I’d rather see a bigger part of the average premium dollar in companies I buy insurance from going toward the advice and service provided by independent agents working on skillful implementation of a complicated product…and less spent on notoriety,” says Evans.

Paul Buse (paul.buse@iiaba.net) is president of Big “I” Advantage^SM and a licensed p-c agent.

VIEW: P&C Trends

Resolving to Make Changes in 2008
Are you keeping your New Year’s resolutions?

As Insurance News & Views begins another year, I realize every week I’m fortunate enough to get to dispense information and recommendations to agents regarding how best to oversee their financial services practice in their agencies. I’m always encouraging members to “self-actualize” on their work habits and strategies, yet I’m also a licensed insurance agent --- in all 50 states --- so the reality is I should practice what I preach.  This year, assuming I make it through it, marks two personal milestones --- my 50th birthday and 25th wedding anniversary. So with that in mind, I’m revealing my own resolutions for 2008. 

Sorting through the kind of advice I should dispense to myself, I thought it would make sense to check with someone with profound insights. Regular readers of this column already know I like to quote Mark Twain, so here is the advice he shared in his last public address in 1909: “There are three things which I consider excellent advice. First, don’t smoke to excess. Second, don’t drink to excess. Third, don’t marry to excess.”

While those are certainly words to the wise, my excesses tend to be peanut M&Ms (especially from other people’s candy jars) and salty snacks. So my list of resolutions runs as follows and perhaps some of these apply to readers as well:

Professional
* Get more up to speed on technology including ipods, cell phone capabilities, etc. and stop using my kids as a crutch.
* Take a computer related class --- especially one dealing with database management.
* Maximize the use of Microsoft Office to be efficient in the administration of my responsibilities.
* Finish my latest insurance designation.
* Check in on the Virtual University on a weekly basis to stay abreast of insurance related education.
* Make sure that I’m in touch with our members and their needs by talking with them and not assuming that I know what they need.
* Get expense accounts and employee reviews done on a timely basis.
* Be a good mentor to the IIABA staff.

Personal
* Lose 10 pounds and have a complete physical this year.
* Don’t make an excuse when I haven’t lost the 10 pounds at year’s end.
* Give my wife an anniversary present that doesn’t have IIABA or Trusted Choice^® printed on it.
* Take a week of uninterrupted vacation and turn off the Blackberry off more often, especially when driving.
* Stay in touch with family and friends as much as possible and find opportunities to be introspective.
* Make sure that I find more time to volunteer and help people with random acts of kindness.
* Don’t complain. I have nothing to complain about.

While that list is probably not exhaustive, if I can accomplish most of these things I will feel that 2008 wasn’t a wasted year. I ran across something called “The Death Clock” (www.deathclock.com) on the internet which is kind of a novel idea that allows you to enter some basic information and then it tells you how long you have to live --- in seconds which count down until your anticipated life expectancy. Of course, tomorrow is promised to no one, but it is an interesting concept in that helps reinforce the reality that we are on this planet for a finite period of time and we should take advantage of every moment. Good luck to all members who have made 2008 resolutions!

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

Tech Update

Real Time Resolve
Real Time campaign leaders offer advice for the New Year.

More independent insurance agents and brokers should resolve to work smarter in 2008, according to a Real Time coalition.

The Real Time/Download campaign (www.getrealtime.org) offers suggestions on how forward-thinking agents and brokers, along with their business partners, can improve operations by making and keeping a few resolutions to improve the efficiency of carrier communications and customer service.

“Real Time allows the independent agent the ability to do what we do best --- consult and advise. Real Time is about the most time consuming part of our day --- data entry. It allows the information to be entered once and flow to management systems, rating systems and company systems. It reduces the chance of data entry errors,” says Lisa Leach Goth, vice president at Charles P. Leach Agency, Inc. in New Bethlehem, Pa. “With Real Time, agents have time to help their customers with what is most important --- protecting their assets. It allows us to get back to the basics of insurance. In this day and age our customer expects us to provide them with accurate information before they even know they want it. Real Time gives us the opportunity to accomplish that.”

The Real Time/Download campaign, supported by independent agents, trade associations, carriers and technology providers across the country, isn’t advocating a specific technology, but a workflow approach that frees up more time for agencies to sell, process and service business. Most agents can leverage tools already contained in their agency management systems or comparative raters.

“We strive to use Real Time tools when they are available. It has helped us to keep our revenue-per-employee numbers high, as well train new and existing employees more easily. If nothing else, not having to remember passwords is a huge benefit to employees, even more so to management who may not have to be in the sites as often. Although there still are some frustrations, the benefits far outweigh the cons,” says Barbara Stevens, senior vice president of Rand Insurance Inc. in Riverside, Conn.

Participants in the Real Time campaign offer the following resolutions to consider:

Agencies
1. Demonstrate commitment to Real Time transactions by having staff members use what is available and having them direct more business to the carriers that offer Real Time as part of their ease-of-doing-business efforts. Use the tools and resources available at www.getrealtime.org to jumpstart the process and to understand, and share with staff, what is available and how to begin.

“Agents cannot wait for all of their carriers to be at the same implementation --- they need to use what is available now so carriers will continue to develop. The carriers that do offer Real Time and make it easier to do business will ultimately get the sale. The easier and faster it is to accomplish transactions, service and ratings, the more time we have to sell and provide better service to our clients,” says Lisa Parry-Becker of Parry Insurance in Langhorne, Pa.

2. Train new employees only on management-system-based Real Time functionality, rather than all of the different workflows required to navigate individual carrier Web sites. Other employees will catch on quickly once they experience the efficiency of Real Time.

3. Make sure Real Time functionality tops the agency’s list of discussion items for carrier planning meetings.

4. For Real Time to be an effective workflow implementation, just like any other change, it takes good reporting and constant management monitoring. Vendors and carriers can help by providing their agencies with tools to make it easy for them to monitor Real Time usage by employees.

5. For agencies already leveraging Real Time inquiry, adding Real Time endorsements is an easy, logical next step. Reducing steps means agents can serve customers quickly and save money.

Business Partners
1.  Educate agents and employees on the benefits of Real Time transactions. Show agents, step-by-step, how to get organized to begin using Real Time and, for those using it, offer advanced training and support.

“Agents need to recognize that technology has become part of a changing business paradigm with regard to customer service. New technology applications such as Real Time are going to change the consumer definition of acceptable customer service time intervals. Real Time offers independent agents the first opportunity ever to provide instant customer service replies on basic inquires and claims inquiry functionality in a multiple-company environment with a single, common workflow model,” says Edgar Higgins Jr., CPCU at Thousand Islands Agency in Clayton, N.Y.

2. Continuously review Real Time implementations with your agencies to validate that they are efficient, eliminate redundant data entry and streamline workflows. The use of industry standards will increase their speed and the consistent workflow will ensure that agents have a smoother experience compared with the carrier’s Web site.

3. Make Real Time transactions a priority on your association or user group advocacy agenda, targeting agents, carriers (both national and regional), vendors and others in the industry.

Few people can make and keep eight resolutions in any given year, so experts recommend choosing one or two and accomplishing them ---then add more.

“If you are not using Real Time, you should give it a try. Start with one company or product, get comfortable with it and the process, and then add more as you see fit. You will definitely see benefits in a short period of time,” Stevens says.

For additional ideas, click here to view the “Real Time Stakeholder Commitments” document.  

Peter Van Aartrijik (peter@aartrijk.com) is Independent Agent magazine contributing editor. Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

Launched in April 2007, the Real Time/Download campaign is dedicated to improving the competitiveness of the independent agency distribution channel. Its participants include independent agencies and brokers, carriers, technology providers, user groups, and agent and industry associations. The campaign goal is to double the use of Real Time in the first year. Most-recent numbers show more than 20,000 real-time transactions are performed industry-wide each business day through agency management systems; this figure excludes real-time rating transactions processed by comparative raters. For more information, visit www.getrealtime.org.