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Big “I” National News

P&C Trends

CFA Accuses P-C Insurers of Price-Gouging

Industry bristles after study attacks insurers, pegs insurance a “low-risk investment.”

The Consumer Federation of America intends for it latest study on p-c insurers’ 2006 profits to facilitate discussion within industry, according to its author, CFA Director J. Robert Hunter. But the study is causing much more than that-- it has plain angered some by accusing insurers of over-charging consumers for their home and auto insurance.

On Jan. 6, several national consumer organizations, including Americans for Insurance Reform and the Center for Insurance Research, joined CFA in the release of the study that blames the industry for “dramatically increased profits and surplus in recent years, in part by systematically overcharging for insurance and shifting costs to consumers.”

Hunter, an actuary, former state insurance commissioner and former federal insurance administrator, says p-c insurers are paying out the lowest claim amounts in ratio to the premiums charged and the ratio appears to be the lowest on record in 50 years.

“Profits are a good thing…having strong industry is a great thing, but excessive profiteering is another thing,” he says.

The study used several common measures of financial health to find that “balance sheets for property-casualty insurers are in better condition overall than at almost any time in recent history.”

Hunter estimates after-tax returns for 2006 at $60 billion and profits in 2004, 2005 and 2006 at approximately $149.2 billion. The loss and loss adjustment expense for 2006 is estimated at 68.3%---the lowest in 27 years, he reports in the study.

While many industry experts attribute the year’s high earnings to a tame hurricane season, among other things, Hunter insists the rate of return is still grossly high.

“If you normalize (the hurricanes) you’d still have record profits, it would be less obscene, but still a profit,” he says.

The accusations of price-gouging have been the biggest sticking point for many insurers and industry organizations, but some are also bristling over CFA’s claim that insurance is not a risky investment.

“Representatives of the insurance industry often claim that high premiums and profits are necessary to compensate for the high risks they bear,” Hunter says. “In fact, insurance is a low-risk investment. Using standard measures of stock market performance that assesses financial safety and stock price stability, the property-casualty insurance industry represents a below-average risk compared to all stocks in the market, safer than investing in a diversified mutual fund.”

In response to the CFA’s study, the Insurance Information Institute issued a statement highlighting that p-c insurers boosted by $55.7 billion its cumulative claims-paying resources in 2006---a number equal to 93% of the $59.8 billion in expect net income. In the statement, the III also disagrees with the CFA’s allegations and defends that insurers have actually lowered prices and are using profits to prepare for 2007.

“Insurers directed a significant share of their 2006 profits and investments back into the business,” says Robert Hartwig, president and chief economist for the III. He also added that 2006 underwriting results, the substantial drop in catastrophe losses and strong investment performance allowed insurers to reinvest billion last year, allowing claims-paying resources to reach a record high estimated $481.5 billion.

While the cost of property insurance continues to escalate in the hurricane-vulnerable coastal areas, Hartwig notes that the majority customers are seeing a break in rates.

“Meanwhile, buyers of insurance in non-coastal states are the big winners as rising profitability has intensified competition throughout the property-casualty insurance industry,” Hartwig says. “The bottom line is that falling insurance prices are lowering the cost of driving a car, owning a home and the cost of doing business for most Americans.”

Click here to view the CFA’s study.

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

P&C Trends

On the Road to Lower Rates

Auto insurance premiums are expected to drop in 2007.

Motorists had it rough in 2006 with rising auto repair costs and sky-high gas prices that climbed to more than $3 a gallon in some areas, but 2007 will provide some relief as the average annual cost for auto insurance is expected to drop by 0.5%, according to the Insurance Information Institute.

The average annual cost for auto insurance premiums nationwide this year is estimated at $847 per policy, which is the first decrease since 1999. The decrease translates into a $4 per policy savings when compared to $851, the typical rate drivers paid in 2006, according to the III. While the decrease may not seem like much, it translates into hundreds of million of dollars in total consumer savings across the country.

“What’s happening is that rates have been falling for consumers for the last two years because fewer claims are being filed, there are fewer accidents and fewer claims being paid. The cost of claims continues to rise, but frequency is decreasing,” says Robert Hartwig, president and chief economist at the III.

The III attributes the price reductions to a declining claim frequency, down approximately 3% to 5 % in 2006 compared to 2005, paired with modest increases in claims severity, with the average cost per claim (including medical care and property damage) rising only 2% to 4% in 2006 compared to 2005.

“The III is finding that the nation’s overall insurance rating system has on the whole become much fairer and more equitable through innovations in underwriting technology,” Hartwig says. Looking at a potential policyholder’s credit score, in conjunction with criteria such as their driving records and driving habits, insurers are able to match with greater precision than ever before the premium they charge in the context of the potential claims they may have to pay a policyholder, he adds.

The p-c industry’s significant earnings in 2006 are also expected to drive down prices in 2007. The expected net income for 2006 is set at $59.8 billion and many insurers are opting to reinvest their profits back into the business, which will effectively lower auto (and home) insurance rates. According to the III, the share of p-c premiums paid relative to the overall economy is expected to drop by 3.1% in 2007 on top of a 2.5% decline in 2006.

The amount of coverage purchased is another factor affecting rates. Each state insists on some level of coverage for its registered drivers, however the National Association of Insurance Commissioners (NAIC) estimated in 2004, for instance, that 23% of insured drivers did not purchase comprehensive coverage and 28% opted against buying collision coverage. Those who buy neither comprehensive nor collision coverage will see lower auto insurance premium rates while choosing to self-insure themselves for theft and other losses.

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

VIEW: Forms & Substance

Some Lenders Refuse to Accept New ACORD Forms

Recently Freddie Mac announced it will no longer accept ACORD evidence of insurance forms. Similarly, just this week Bank of America decided to no longer accept ACORD certificates of insurance or evidence of insurance forms. While a resolution for this problem is on the horizon, the Big “I” has produced a new report that addresses a number of problems involving certificates of insurance.

During 2006, E&O claims involving certificates of insurance increased 28%. Almost one in 20 E&O claims now involves a certificate of insurance. The two main sources of certificate E&O claims are failure to add or improperly identifying additional insureds (36%) and misrepresenting coverage on the certificate that doesn’t actually exist (21%).

The Big “I” Virtual University “Ask an Expert” service has closely tracked these statistics and has answered dozens of questions about certificates during the past seven years. As a result, the VU has identified three major recurring problems involving certificates of insurance, including: the unwillingness of insurers to provide notice to certificate holders of cancellation, despite the “we will endeavor to” language in most certificates of insurance; onerous insurance requirements by large contactors, huge corporations, governmental/public entities, etc. that cannot be met by coverages typically available in the admitted marketplace; and certificate fraud by agents and insureds (including the indication of coverages or conditions that don't exist) so an insured subcontractor can get a construction job or get paid for one.

The unwillingness of insurers to provide notice of cancellation has existed for many years and is just now being questioned in an ethical context. The other two problems represent an emerging issue that has become an increasing problem for agents and insureds alike.

For example, a contract might require that the certificate requestor be named as an additional insured (something the insurer may or may not be willing to do), be provided notice of cancellation (something rarely afforded to additional insureds in an insurance contract) or be provided with a type of coverage (e.g., completed operations) that the insurer cannot or will not provide. Such contracts may specify certain endorsements by form number and edition date that the insurer cannot provide because they have been superseded by new editions and the older ones have been withdrawn.

As a result, agents are sometimes asked to produce a certificate that cannot comply with the contract the insured has signed. Refusing to do so, agents often face the claim from the insured or certificate requestor that they know of agents who can or will provide such certificates. Failure to do the same could mean the loss of an account for the agency. These unreasonable requests too often lead to the issuance of fraudulent certificates by insureds or agents.

The issue of onerous insurance requirements is largely an educational one. From the standpoint of many businesses and governmental entities, it doesn’t hurt to ask for more, but it’s not likely they’ll get it. As one attorney opined, “I ask for everything I can get. It’s the other guy’s responsibility to say no.” In many instances, these organizations are asking for concessions for which there is no insurance product in the marketplace. They ask because they have the leverage to do so. Unfortunately, some agents will indicate ― usually by a certificate of insurance―that their insured is in compliance. It could be that the additional insured isn’t concerned, knowing that the agent’s E&O insurance provides a backstop.

Often organizations will ask for coverages out of ignorance. Contracts may specify additional insured endorsements that are dated more than 20 years ago. If a company (or ISO) has filed a new endorsement and withdrawn an older one, the carrier cannot legally provide the older form without refilling it. However, some agents will indicate on the certificate of insurance that the form or the equivalent is being provided.

One other issue is the “will endeavor to” cancellation wording that very few insurers follow. This has potential to become a legal problem, though right now it's more often considered one of ethics―is it ethical to provide a certificate that says the insurer will attempt/try (i.e. endeavor) to provide cancellation notice when it's clear that the insurer has no intention of doing so?

To respond to the escalation of E&O claims and problems involving certificates of insurance and related forms, the Big “I” has developed a new 53-page white paper entitled, “Certificates of Insurance: Issues and Answers.” You can access an executive summary and the complete report on the Virtual University Web site by clicking  here. The paper is free to Big “I” members and paid VU subscribers and for a fee to non-members and non-subscribers.

Bill Wilson (bill.wilson@iiaba.net) is Big “I” director of the Virtual University.

On the Hill

Big “I” Applauds Members for Introducing Natural Disaster Legislation

Brown-Waite/Buchanan will help spur debate on growing issue.

The Big “I” applauds Reps. Ginny Brown-Waite (R-Fla.) and Vern Buchanan (R-Fla.) for introducing legislation to address the growing problem of natural disasters.

The Brown-Waite/Buchanan bill, the Homeowners’ Insurance Protection Act, encourages states to establish catastrophe funds to protect against natural disasters. Additionally, the bill establishes Catastrophe Capital Reserve Funds for private insurers, in a bid to keep homeowners’ insurance rates affordable. The proposal is intended to help prevent potential insolvencies and create a more stable private insurance market, ultimately making catastrophe insurance more available before and after a major disaster, with the reserve funds helping prevent consumers from being hurt by insurance insolvencies.

“The Big ‘I’ and its 300,000 members nationwide are very pleased that Representatives Brown-Waite and Buchanan have introduced natural disaster legislation,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Natural disasters are a national problem that requires a national solution, and we applaud the leadership shown by these members in advancing solutions to this problem.”

The Big “I” has been a leader in advocating for natural disaster solutions, testifying on several occasions before the House Financial Services Committee in the 109^th Congress on the need for Congress to address this problem.

“All Americans are impacted by natural disasters as consumers and taxpayers, and it is crucial that we develop a solution to this growing problem” says Brendan Reilly, Big “I” assistant vice president for federal government affairs. “We urge the public and private sectors to come together to find a common solution that will serve consumers and protect taxpayers.”

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

L&H Trends

En Route to Greater Productivity

Tips for taking advantage of technology while traveling.

A recent survey indicates that commuting times continue to increase, which is no surprise to independent agents living in a metropolitan area. The average travel time to work in the United States is growing steadily. From 1980 to 1990, it increased 40 seconds, from 21.7 minutes to 22.4 minutes for a one-way trip. In the next decade ,it increased by about three minutes to 25.5, according to “Commuting in America” by Alan Pisarski, a 2006 study published by the Transportation Research Board. For those fortunate agents who have a five-minute commute to the agency, don’t forget about the time you spend traveling to meetings.

What is point of this dreary statistic? Well, fortunately technology now affords a variety of ways to get information while in a car, without the dangerous habit of checking e-mails on a Blackberry and/or talking on a cell phone. With the advent of CDs and iPods, commuters can now target the type of professional information they want and need to hear without infringing on precious personal time. In fact, efficiency guru Brian Tracey recommends that professionals spend at least one hour a day learning about the latest developments in their field so that can stay informed and meet the needs of their customers.

Agents who take mass transit or who travel for work also have the opportunity to take a variety of online classes (e.g. the IIABA’s Virtual University). Due to the need to allow adequate time for security screening, many travelers find themselves with an hour or so before take off in the airport. Since many airports now offer Internet connections, it is easy to catch up on professional education. So regardless of the amount of time or location, you can turn travel time into productive education time.

A lot of people have their laptop computers out on a flight, but then again many of those people are either watching a movie or playing solitaire. While there is nothing wrong with having some recreational time to unwind, by budgeting travel time more efficiently, travelers can stay up to date with industry developments and actually have more leisure time. And nothing beats the convenience of being able to toss a news-worthy magazine in a briefcase to take on a trip.

Regardless of commute time or traveling situation, resolve to take advantage of the time in 2007 and make it a prosperous year. 

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