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Shifting Trends in Homeowners Market |  Even with TRIA, Industry Shoulders Terrorism Risk Burden |  Drive Embarks on Second Year |  Flight of the Snowbird |  How to Create Enforceable Non-Compete Agreements | Big "I" National News

P & C   T R E N D S
Shifting Trends in Homeowners Market

Home is where the heart is—and the money. The National Association of Insurance Commissioners’ recently released "2003 Homeowners Insurance Report" details factors affecting the current homeowners insurance market.

According to the report, in 2003, the national market was comprised of 83.5% homeowners owner-occupied policies, 14.3% tenant and condominium policies and 2.2% dwelling fire policies.

Several factors affect the cost of homeowners insurance. The NAIC report singles out the following as the most significant:

· Geographic area, real estate and construction costs.
It comes as no surprise that the report finds higher-populated areas tend to have higher home insurance premiums due to real estate value and construction costs. Vacation homes and popular retirement destinations also have higher real estate values "where there is an influx of money from outside the community and areas of rapid economic development," according to the report.

Local climate and building regulations affect construction pricing. "Higher expected repair costs for value-added designs to reduce damages to the structure from earthquakes or hurricanes will impact the price of insurance," the report says.

· Catastrophe exposure.
With the up tick in catastrophes in the past two decades, their influence over homeowners rates has grown.

The report points out that until 1996, the Property Claims Services Division of the Insurance Services Office labeled an event a catastrophe if insured losses reached $5 million. Since 1997, that number changed to $25 million. From 1994 to 2003, U.S. catastrophes resulted in $115 billion in insured losses.

The increasing threat of catastrophes has ushered in the computer modeling age. "Insurers now use computer catastrophe models to more accurately estimate the potential cost of catastrophe events, particularly when there is not a sufficient amount of loss experience with similar risk characteristics," the report says. "For example, the potential insured loss in the New Madrid region due to an earthquake is predicted to be significant, but the fact that the last major quake in that area occurred in 1821—when there were considerably fewer people and buildings—makes it difficult to use any previous experience to accurately price earthquake coverage in the area."

· Mold damage.
Due to the abundance of recent litigation related to mold, the report singles out mold damage for its affect on homeowners rates.

"Many insurers have considered damage from mold an excluded cause of loss, and the cost of paying for potential claims related to mold has not generally been factored into the price of most property policies," the report says. "Recently, however, courts in several states have found that in the absence of specific exclusionary language in the policy, payment for certain types of mold damage is required."

The report cites as examples damage resulting from an otherwise covered peril, builders’ liability for new construction methods and materials’ mold damage and the property owners’ liability for potential health problems due to inhalation of mold spores.

· Terrorism.
In the wake of Sept. 11, 2001, insurers no longer think the United States is immune from terrorist attacks. Although the 2001 attack mainly affected commercial insurers and reinsurers, some personal property also was lost. However, the report finds that the threat of terrorism has not impacted homowners rates.

Other factors that influence homeowners insurance include building structures, urban/rural issues such as the high number of renters in urban cities, economic considerations and the regulatory environment.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

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O N   T H E   H I L L
Even with TRIA, Industry Shoulders Terrorism Risk Burden

A leading risk-management company’s study shows that although the terrorism risk burden has increased for insurers, the newly enacted federal backstop still provides vital protection for the insurance industry.

The analysis, published by Risk Management Solutions (RMS) of Newark, Calif., indicates that the terms of the modified Terrorism Risk Insurance Act (TRIA) mean that the industry would retain 90% of the modeled average annual losses. The study also shows that if an attack occurs, there is less than a 10% chance that it would reach the industry deductible because only the most extreme, low-probability attacks would cause losses in excess of $30 billion. However, in the event of a major catastrophe, the federal role could be substantial.

The study notes these postulations while advising that the insurance industry take advantage of the legislation’s two-year window to prepare for facing terrorism risk without a federal backstop—through sound underwriting practices and accumulation controls, good analytical tools and discipline.

"Near-term terrorism risk in the U.S. has decreased since the initial TRIA bill, mainly due to homeland counter-terrorism measures, but the Jihadist threat continues to rise worldwide," says Dr. Andrew Coburn, RMS director of terrorism research. "Anti-American terrorist attacks have increased worldwide, and the U.S. homeland remains a primary target for Jihadist terror groups. Our assessment suggests that the threat of macro-attacks within the U.S. will remain for many years. More troubling is that the capability of threat groups to carry out larger-scale attacks is increasing over time."

The Big "I" worked for more than a year to extend the federal backstop, and the final bill reflected a compromise between those elected leaders who wanted the original TRIA bill essentially kept in place, those who wanted it to lapse on its Dec. 31, 2005, expiration date, and those who wanted to retain a temporary stopgap.

"We knew going in that the industry would have to accept a greater share of the burden for insuring catastrophic terrorist attacks, but that was what had been envisioned from the beginning," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "TRIA was never intended by Congress or the president to be a permanent solution. But at this time, the industry simply has not had enough time to increase its risk capacity to acceptable levels, and that is why we pushed hard—and successfully—to retain federal support in insuring as-yet uninsurable risks."

The new legislation expires Dec. 31, 2007.

Cliston Brown (cliston.brown) is Big "I" director of public affairs.

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C A R R I E R   N E W S
Drive Embarks on Second Year
Drive president shares lessons learned and future plans for the agent brand.

What a difference a year makes. After spending 2005 rolling out national television spots and local agent marketing efforts, Drive celebrates its one-year anniversary this month. Bob Williams, Drive group president, talked to IN&V about the brand’s accomplishments, disappointments and plans for the future.

IN&V: What has surprised you the most in the process of introducing the brand?

A: We really tried to do our homework on rolling out the brand and vetted some of the concepts with our larger agents and national agency organizations. We felt optimistic about our planning but there was a lot of risk associated in changing our brand and you can’t ever really know what’s going to happen. We worried that we might get negative agent reaction around the change. The thing that probably surprised us the most was that our largest agents embraced the brand concept more fervently than we would have expected.

IN&V: What has been the brand’s biggest accomplishment thus far?

A: The biggest accomplishment for us was really getting through the first year’s conversion without going through any undue catastrophe. There was a lot of logistics: we replaced over 9,500 of the old signs with Drive signs at different agencies, we placed new display ads in over 500 Yellow Pages directories with local agent listings, there were another 1,100 trademark Yellow Page ads, we set up a new Web site for consumers. Most importantly, our agents and Drive shared 6 million in force customers and we needed to convert them. We didn’t know what their reaction would be and what we found was in the re-branding we didn’t create disruption. Retention rates seemed to hold if not improve.

IN&V: If you had to roll out the new brand again, what would you do differently?

A: Our primary activity in the first year beyond all of the logistics was T.V. advertising to establish the new brand. It was branding---they weren’t "call to action" ads---but we did expect those ads to generate a flow into driveinsurance.com which would then result in referrals. If I have a disappointment from the year it’s that we would have like to have gotten a lot more referral flow than we did from those ads.

IN&V: What have you learned from Drive’s advertising efforts in 2005 and what will agents see that is different in 2006?

A: One thing we learned is that it really does take time to create branding awareness among consumers. We will spend a similar advertising budget in 2006 as we did in 2005. We’re really looking at the year in two pieces. First, we’re going to have new television branding ads which we hope are going to be really strong in bringing home the Drive name to consumers and making sure it’s associated with agents. A lot of the expenditures in the first have of 2006 will be associated with national T.V. buys. In the second half of the year, we’re hoping that we will have created a media plan that will be more demand-generation oriented. We intend to highlight Trusted Choice® logo whenever possible in our advertising.

We did a lot of localized testing with different individual agents through co-branded direct mail to try to target consumers. We came up with some success so we’re going to make that program broadly available to agents. We also had great success in setting up Yellow Pages ads with our agents which includes a remote call-forwarding number which helps agents track how many calls they actually get out of the ads. We’ll continue that in 2006 with agents that show interest. We’ve also been testing co-branded billboards and radio ads in some markets which include local agent contact information. We’ll have test results on that program in the next couple of months. We’re also introducing a few feature we’re calling "agent marketing tools" in the first quarter of 2006 which will help agents access customized branded marketing tools like direct mail, print ads, press releases and other items.

We’ve had agents ask us why we’re not running as many ads as Geico or Progressive Direct or other direct writers. We need to do a job of communicating that we’re an agency writer and we’re going succeed by both doing a national media campaign and using the localized leverage of thousands agents we’re doing business with. We’re spending money on both. The unique thing we bring to the party is that we have scale; we’re really the only national carrier that is advertising at the national level for independent agents. There are a lot of parallels with Trusted Choice®—you can do the national ads, but you need the troops on the ground to leverage the brand too. And we’re going to do both.

Katie Butler (katie.butler@iiaba.net) is IA editor-in-chief.

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L & H   T R E N D S
Flight of the Snowbird

Snowbirds are a growing population of retirees who migrate south to spend part of the year in warmer locals like Florida and Arizona. As we approach the dead of the winter and your snowbird customers are scarce, consider what their flight patterns mean from a business standpoint.

Independent agents who offer life and health products should consider several things. In high property and state income tax states like New York and New Jersey, many retirees have migrated to—or changed their residences by living at least half a year in—Florida, Nevada and Texas to escape state income taxes and have considerably lower property taxes.

Some individuals want to retire to a warmer climate and prefer a college town. A town like Oxford, Miss. (home of Ole Miss) is a great candidate with its good medical care, low housing costs, distributions from IRAs and 401(k)s and exemption of Social Security benefits from state income tax. There is also a homestead exemption that lowers the property tax bill for senior citizens; a heavily taxed retiree can save thousands of dollars in taxes.

Does this trend mean that agencies will lose customers? The answer is no. In fact, technology is making it easier to stay in touch with them. Make sure that you get your customers’ e-mail addresses so that if they move south, they still feel in touch with your agency and tied to the community. In addition to sending updates by regular mail, try periodically sending out e-newsletters. Most people who move south tend to be seniors, so your e-newsletter can contain updates on new prescription drug benefit, health and fitness items and other related. And, since most former residents have family and/or friends who they return to visit during the summer, encourage them to schedule an appointment in the agency to review their situation.

Changing state residences also means rewriting wills so that they comply with the applicable laws. This may impact revisiting beneficiary designations that are coordinated with the will. Also, if the agent is a registered representative and has business such as mutual funds, variable annuities, etc., with customers who move out of state, he/she must be licensed in the new state to avoid running afoul of the NASD. This requirement can cause problems for customers who spend just the winter in a different state. If a Registered Rep sends mail to an out-of-state address (even if customers maintain a primary residence in their current state), they need to be licensed in that additional state.

Many states openly court retirees. However, life-health agents can maintain their relationships with a customer who moves to a different part of the country. To write new life-health business, they need to be licensed in that state. It may make perfect sense for an agent based in Syracuse to be licensed in both New York and Florida.

Northern agencies offering financial services should stay in touch with customers who they have invested many years in relationships with. Use technology to efficiently communicate and comply with applicable licensing requirements.

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

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A G E N C Y   M A N A G E M E N T
How to Create Enforceable Non-Compete Agreements

Unfortunately, the majority of agencies still do not have non-compete and non-piracy agreements with producers and other key employees. Three things can happen without these agreements, and two of them are bad:

1. The relationship between the producers, employees and the agency continues in good stead until they retire.

2. Producers or employees unhappy with the agency leave and market themselves as being able to bring many accounts with them (their own produced accounts or other agency accounts with which they are familiar).

3. Successful producers use their produced book of business as leverage for additional compensation or ownership or they will leave for another firm.

If you ever want to sell your agency, its value to a buyer suffers if ownership of accounts is in question. The new owner never knows whether or not your producers will choose to stay with the agency or leave, challenging the new owner on every purchased account. In this case, valuers will discount the agency's value in a transaction. You should expect any agency ownership transfer to include a retention factor (a further risk to the former owner) if non-compete or non-piracy clauses do not exist.

First, let’s define and differentiate between non-compete and non-piracy agreements: A non-compete agreement forbids a producer or controlling employee from taking accounts for which they are responsible to another agency. A non-piracy agreement forbids a producer or other employee from taking other agency accounts or prospects to another agency.

The first and primary rule in enforcing non-compete and non-piracy agreements is that you cannot enforce an agreement that forbids a person from earning a living in the profession of his/her choice in his/her hometown or familiar geographic area. The courts always lean toward the former employee if they perceive a prohibition against that employee being allowed to earn a living. Nor do they look kindly on a former employer trying to force an employee to move from familiar surroundings if he/she wants to work in the profession.

However, you can construct a non-compete and/or non-piracy agreement in a way that protects the agency while not prohibiting the employee from moving to another employer within the same area and practicing the same profession as with his/her prior employer.

A non-piracy agreement differs from a non-compete agreement in that it applies to agency clients and prospects that a former employee was not specifically responsible for. The classic example involves the copying or printing of files, policies or expirations and their use as a solicitation device by the former employee (or a firm the former employee moved to, using the files as leverage). There is no question of the ownership of these accounts and prospect information. If a former employee takes and uses data about clients or prospects the former employer created, it is considered theft of information. The only question is how long that information is exempted from use by a former employee within a non-piracy agreement.

For more information on how to construct these agreements within established legal guidelines while protecting the agency, click here.

Al Diamond (al@agencyconsulting.com) is president of Agency Consulting Group, Inc., a national consulting firm for insurance agencies.

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