T H U R S D A Y,    J A N U A R Y   1 3 ,   2 0 0 5 

Insurance Industry Remains in Spotlight   |   Independent Agents and Brokers See Growth in Premium and Market Share   |   Independent Agents, Meet Independent Contractors   |   Big “I” Continues Push for TRIA Renewal Amidst Troubling Development   |   Asbestos Bill a Good Start, but More Protections Needed   |   Covering PDAs, MP3 Players and Other Gadgets   |   Big "I" National News    |

B R O K E R   F E E   I S S U E   U P D A T E
Insurance Industry Remains in Spotlight

The insurance industry remained the focus of intense scrutiny in the past week, with New York Attorney General Eliot Spitzer fulfilling his promise to intensify his probes. As Marsh announced the appointment of new senior vice presidents, it also dealt with the guilty plea of a senior executive. Additionally, ACE Ltd. replaced its top executive and General Re received a subpoena from Spitzer.

Spitzer testified at a Jan. 7 New York State Assembly insurance committee meeting that his investigations will reach the top levels of management and executives, according to a Reuters report.

“We are moving forward very aggressively with criminal cases against individuals and will pursue those as far up within the structure of these companies as we possibly can,” Spitzer said.

Spitzer also told the committee that his office uncovered bid-rigging and pay-for-play activities on the personal-lines side of insurance.

Additionally, he warned about potential problems with off-shore insurers. “Spitzer also noted his concerns that insurers based overseas, or in offshore havens such as Bermuda, are outside the state’s regulatory reach though they do business in New York,” says the Reuters article. “He said state and U.S. lawmakers should consider new rules that could improve regulators’ capacity to gather information from these companies.”

Just a day before the meeting, word came from Spitzer’s office that a senior Marsh, Inc. executive had pleaded guilty to criminal charges. Robert Sterns, a Marsh broker and senior vice president, is the first Marsh employee convicted in Spitzer’s investigation.

According to a statement issued by Spitzer’s office, Sterns admitted in his guilty plea “that during a period from 2002 to 2004, he instructed insurance companies to submit noncompetitive bids for insurance business and conveyed these bids to Marsh clients under false and fraudulent pretenses. These noncompetitive bids allowed Marsh to control the market, to protect incumbent insurance carriers when their business was up for renewal and to maximize Marsh’s profits.”

He is the sixth executive from four insurance companies to plead guilty to criminal charges. Spitzer said all six individuals are expected to testify in future cases.

Marsh & McLennan Companies said via a statement that it was “saddened by this development” and that it will continue to cooperate with Spitzer’s investigation.

The following day, Jan. 7, Marsh announced the appointment of E. Scott Gilbert to the newly created position of senior vice president and chief compliance officer. Also joining the company are Michael A. Beber as senior vice president and chief strategic development officer and Michael A. Petrullo as senior vice president and chief administrative officer.

In other executive news, Ace Ltd. announced Jan. 6 that Susan Rivera resigned as president of ACE INA Holdings and as president and CEO of ACE USA. Ace did not elaborate on the reason behind Rivera’s departure. Brian E. Dowd is Ace’s new head of U.S. operations.

Meanwhile, Berkshire Hathaway Inc.’s General Re Corporation subsidiary received a subpoena from Spitzer’s office Jan. 7 that sought the same information as a previously received inquiry from the U.S. Securities and Exchange Commission. According to an Associated Press report, “the subpoena seeks documentation and information relating to nontraditional or loss mitigation insurance products from General Re and all its affiliates.”

The AP also reports that “federal and state regulators have been examining loss mitigation products to see whether insurance companies sold products that may not really be insurance, but instead may be aimed at helping companies smooth out earnings.”

Berkshire Hathaway said via a statement that it intends to fully cooperate with the investigations.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA magazine’s associate editor. | T O P |
 

P & C   T R E N D S
Independent Agents and Brokers See Growth in Premium and Market Share

The overall property-casualty market grew 9.5% in 2003, and independent agents and brokers produced 59.4% of this market, according to the recently released Big “I” report “The 2003 Property-Casualty Insurance Market.” Even more positive, the independent agency system grew its overall market share by 0.7 points in 2003, achieving growth in share in both commercial and personal lines.

The p-c market weighed in at $434.68 billion in direct written premiums in 2003, of which independent agents and brokers wrote $258.17 billion. The overall market increased by $41.29 billion, and the independent agency system produced $27.27 billion of this growth.

These results reinforce the strong consumer and business acceptance of the independent agency and broker distribution model, and the very real opportunities for growth that are present for independent agencies and brokers in this business, says the report.

The research also notes that that there are efficient companies using each type of distribution system and that efficient independent agency writers are able to deliver insurance just as cost effectively as the captive agent writers and many of the direct companies, and in some cases, even more so.

On the commercial-lines side, the market share report finds that the market continued to grow at the double digit rate of 11.8% in 2003 to $229.14 billion. This growth of over $24 billion in commercial lines written premium followed a strong year of growth in 2002, when this market increased by 19%. 

The personal-lines market also experienced a healthy growth of 9% in 2003 to $205.54 billion, following 11% growth in 2002. Independent agents and brokers added $6.82 billion in premium in 2003, building upon the $6.7 billion in personal-lines premiums they added in 2002.

Independent agents and brokers increased their market share in personal lines by three tenths of a percent to 36.62% at the expense of the captive agent companies.

In addition, independent agents and brokers increased their commercial lines market share in 2003 by over a half of a percent to 79.83%. Because independent agents and brokers write almost 80% of this business, they experienced an increase in premium of $20.45 billion in 2003 following a more than $25 billion increase in 2002.

The full report provides total as well as independent agency premium volumes for the given lines, as well as the respective market shares for distribution systems. 

The Big “I” contracts annually with A.M. Best Company to assess the state of the independent agency system with year-end industry market share and company-expense data. A complete copy of “The 2003 Property-Casualty Insurance Market” will be available on the Big "I" Virtual University Web site soon.

Madelyn Flannagan (madelyn.flannagan@iiaba.net) is Big “I” vice president of education and research.| T O P |
 

L & H   T R E N D S
Independent Agents, Meet Independent Contractors

Does your agency treat some of its producers as independent contractors to avoid paying FICA taxes on their behalf and offering them agency-provided employee benefits?

Many industries and companies regard employees in a similar fashion. Even if your agency does not, the issue is not irrelevant. As companies begin to re-evaluate the classification of their employees, independent agents are in a position to help these individuals offer their own employee benefits.

FedEx is a prime example. The IRS plans to review the status of about 13,500 FedEx “contract” drivers to determine if the company is violating the rules that outline who is an independent contractor and who is an employee for payroll taxes and benefits.

At the heart of the issue is determining how much control the company exerts over the individual who is providing services. To be deemed “independent, contractors should have flexibility in performing their jobs. According to the Wall Street Journal, the Government Accountability Office, the investigative arm of Congress, estimates that 38% of employers examined by the IRS have misclassified workers as independent contractors.

With the expansion of independent contractor status, these individuals will need assistance with offering their own employee benefits, particularly medical, life and disability insurance and retirement plans. While organizations like FedEx may offer benefits on a contributory basis, there may be alternatives that better fit that particular person’s needs.

For example, independent contractor FedEx drivers—or other self-employed people—might benefit from opening a Simplified Employee Pension (SEP) on their behalf that allows them to contribute up to 25% of their pay into an account. A self-employed individual with net compensation of $80,000 could put up to $20,000 aside in a SEP. The FICA savings would be over $3,000 alone. If the person was in the 25% marginal federal tax bracket and 5% state income tax bracket, the additional savings would be another $6,000, for a grand total of more than $9,000, making the net cost of the contribution $11,000—yet $20,000 would be contributed on the person’s behalf.

The same lessons apply to small businesses in addition to large corporations. The formation and growth of small businesses is a huge contributor to the economy’s growth during the past decade. While the public thinks that the largest 500 companies, i.e. the Standard & Poor’s 500, dominate the workplace, the reality is that that the S&P 500 has not added any net new job growth over the past decade. The entrepreneurial spirit of small businesses, aided by technology to level the playing field, has been the catalyst of the U.S. economy.

This is a positive development for independent agents. In addition to needing small commercial insurance policies, the businesses’ owners and their employees need assistance providing health insurance and retirement plans. By providing one-stop service, independent agents can meet the benefits objectives of these businesses. This is particularly true when a one-person business starts to grow and needs to add staff. Not offering any benefits will be a big handicap when trying to recruit competent employees.

As this trend continues, independent agents can help the success of their agencies by helping these new entrepreneurs meet the needs of their business.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine.  | T O P |

O N   T H E   H I L L
Big “I” Continues Push for TRIA Renewal
Amidst Troubling Development

In a troubling development, the Congressional Budget Office (CBO) released a report indicating that renewing the Terrorism Risk Insurance Act (TRIA) actually might discourage businesses from taking steps to reduce exposure to terrorism. It touts supposedly positive economic consequences to allowing the act to expire, and reports that expiration might encourage businesses to adopt loss-reduction measures.

The report has been met with skepticism from the insurance industry, including the Big “I,” which strongly supports renewing TRIA. The basic position of the industry is that terrorism risks are unlike other potential loss hazards, and that its unpredictability makes it very difficult to plan for loss prevention.

“To relate acts of terrorism to risks like fire or weather-related events is like comparing apples and oranges,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs. “Certainly there are steps that can be taken to minimize foreseeable risks, but it is one thing to build a structure to be more weather or fire resistant, and it is another entirely to try to anticipate every type of terrorist attack that might occur.  No amount of structural creativity can absorb a hit from a missile, a jet airplane, a ‘dirty bomb’ or any other massive, catastrophic type of attack that terrorists likely would employ if given the opportunity.”

TRIA is scheduled to expire Dec. 31, 2005; the Big “I” and its industry partners are lobbying for extension of the act as a backstop to uninsurable terrorism losses. The cost of terrorism insurance, without a federal backstop, would be prohibitive and likely would mean that a number of businesses would not be able to afford it, leaving themselves financially exposed in the event of a terrorist act. The industry believes that uninsured terrorist attacks could have severe consequences not only to any businesses that might be attacked, but to the national economy as well.

The CBO report does not dispute troublesome economic consequences if TRIA expires, and even notes that a catastrophic loss due to terrorism could create scarcity of coverage, price hikes and uninsured capital assets.

“Our nation’s economy continues to recover, but one large-scale terrorist attack could have a ripple effect and forestall that recovery,” Symington says. “This federal support is crucial and is in our best national interests.”

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations. | T O P |

O N   T H E   H I L L
Asbestos Bill a Good Start,
but More Protections Needed

The Independent Insurance Agents & Brokers of America applauded Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) for moving quickly to hold hearings on proposed asbestos legislation, but would like to see additional protections added to insulate insurers and manufacturers against potential insolvency and to avoid putting asbestos cases back into the court system.

The Big “I” joined with several industry partners Jan. 11 to address these concerns in a hearing before the Judiciary Committee on the Fairness in Asbestos Injury Resolution (FAIR) Act. Specifically, the industry coalition said it sought fairness in funding, with insurers paying appropriate amounts toward a proposed trust fund, as well as a national solution providing finality and certainty, with no leakage back into the tort system.

“We are gratified to see Chairman Specter take action quickly on this issue, and we hope to work with him and the committee to ensure that any areas of concern can be remedied to the satisfaction of all parties,” said Charles E. Symington Jr., Big “I” senior vice president of federal government affairs.

On the first point, the industry coalition expressed concern that the most recent draft of the asbestos litigation legislation contains no aggregate payment levels, which would make it impossible to determine the cost of the proposed trust fund. Insurers are pledged to pay a maximum of $46 billion to the trust fund. The industry partners also noted that they were concerned about paying these massive contributions into the trust fund when the proposed legislation could leave the door open for a potential return to the legal system.

“It is very important that the funding proposal be fair and explicitly stated, so that insurers do not risk being on the hook for more money than was envisioned all along,” Symington said. “We also believe policymakers should not require insurers to pay vast sums into a trust fund that may not provide a final resolution to the problem.”

Regarding the latter point, the Big “I” and its industry partners seek provisions that would avoid the reversion of claims to the courts. The coalition suggests that the bill should clearly terminate the litigation system and provide for timely implementation of the trust fund to avoid any potential reasons for a return to the tort system. This is important not only to provide fairness and certainty to those paying compensation, but also to provide timely justice to individuals who truly have been injured.

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations. | T O P |

F O R M S   A N D   S U B S T A N C E
Covering PDAs, MP3 Players and Other Gadgets

If you’re a typical American businessperson with a family, chances are you have one or more PDAs, MP3 players or other electronic media gadgets in your household, particularly since such devices were popular holiday gifts. Needless to say, these devices can cost several hundred dollars, not to mention the value of the information, songs or other media, and the cost to restore this electronic information if damaged or destroyed. Just what coverage does your HO policy afford, if any?

The Virtual University’s “Ask an Expert” service recently received the following inquiry:

“I know I am getting old when I don’t use (or understand) the technological gadgets that are coming on the market and am concerned, as an insurance broker, if this lack of understanding leaves my clients uninsured.

“What are the appropriate ways to properly insure MP3 players, iPods or any handheld device (like Palm Pilots) where our clients may be paying for downloaded information from the Internet? If an iPod holds 2,500 songs at 99 cents per song, there is potentially a good sized exposure.

“Obviously there is the cost of the device, but what about the lost data? What about the cost in time of the insured to download 2,500 songs onto the replaced electronic device? Can these types of devices be backed up by the user? What about a mechanical breakdown that causes the loss of all data? How does one deal with the varying value of downloaded data over a period of time?

“Obviously a named peril (homeowners policy) does not cut it. Are underwriters willing to insure these items on an inland marine policy?”

This is a great question. No doubt there are thousands of consumers with thousands of dollars worth of downloaded music on their MP3 players, not to mention PDA users with important data on their handheld devices.

Needless to say, insurance is not the only solution to risk exposures, though it’s the risk management technique that we’ll focus on here. Typically, electronic information is downloaded to a PC, then to the handheld device. So, there is naturally some spreading of risk by automatically creating a backup. It is also a good idea to maintain a secondary backup off-site.

You must have damage from a covered peril. With the standard ISO HO-3, you’re limited to the 16 named perils. Using the HO-5 (or HO-15 endorsement in the HO-91 program) converts the named peril to “special causes of loss,” thus providing broader coverage, though the most common exposures such as wear and tear and mechanical breakdown would not be covered. The device itself is covered, assuming it’s used for personal, not business, use. That could limit coverage; otherwise, you’d have full Coverage C worldwide. Clearly the “lost time” to download isn’t covered since the policy only covers “direct damage,” with minor exceptions as noted below.

Under the Special Limits of Liability, the policy provides $1,500 coverage for certain types of personal data (we know that there is no coverage for business data). This limit includes the cost to research, replace or restore the information from the lost or damaged material. Whether MP3 songs qualify, as required by the policy language, as “records” is perhaps debatable, but there is little doubt that PDA records would certainly qualify for this coverage if damage results for a covered peril. To read the full article, click here.

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