T H U R S D A Y ,   J A N U A R Y   1 9 ,   2 0 0 6

Allstate CEO Endorses National Cat Fund |  Corporate Conduct in the Post-Sarbanes Oxley Era |  Industry Execs Optimistic about 2006’s Profit Potential, Weary of Catastrophes |  Encompass Names New President |  Don’t Skip the Basics | Big "I" National News

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Allstate CEO Endorses National Cat Fund
Big “I” seeks industry unity to move natural-disaster legislation.

The chief executive of Allstate Corp. has endorsed a proposal to create a national insurance catastrophe fund as a backstop to state disaster funds.

"America is woefully unprepared for another event like (Hurricane) Katrina," Allstate Chairman and CEO Edward Liddy told the Associated Press. He had also endorsed the idea for a new fund Friday before the National Press Club in Washington, D.C.

But there is a split in the industry; reportedly, only a few insurance companies support the Allstate proposal.

Industry unity is a key ingredient in advancing legislation through Congress. Finding a unified solution on natural disaster legislation is one of the top legislative agenda items in 2006 for the Big "I" at the federal and state levels.

There currently are four bills on the subject that have been introduced in Congress, and two general approaches: creating a federal reinsurance program or allowing insurance companies to set aside tax-free reserves for certain catastrophic risks.

"The Big ‘I’ will continue to support federal legislation that leads to greater availability of coverage for catastrophic risk and better markets for consumers," says Charles Symington, Big "I" senior vice president for government affairs and federal relations. "We also intend to work closely with others in the insurance marketplace to reach consensus on how to deal with this national problem."

This will also be an important issue at the state level, as many states will continue to consider catastrophe-related issues. States likely will look at issues such as enhanced building codes (and the enforcement of such codes) in disaster-prone areas and other ways to promote mitigation before catastrophes strike. In some states, there will be debates about the need for state or regional catastrophe funds, modeled after similar funds currently in place in Florida and California. State regulators and the National Association of Insurance Commissioners are expected to actively participate in the state and federal debates, and the NAIC is currently working on its own comprehensive proposal. 

"The Big "I" supports legislative and regulatory efforts that restore healthy competition, bring insurers back to threatened areas, promote mitigation and effective planning and take other meaningful steps to ensure that communities are better prepared for future catastrophic events," says Wes Bissett, Big "I" senior vice president for government affairs and state relations. "There are no easy answers, but we will continue to participate actively in these important policy discussions."

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

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P & C   T R E N D S
Corporate Conduct in the Post-Sarbanes Oxley Era

Corporate fraud and misconduct are still very present in the business world post Sarbanes-Oxley, but there is good news. Ethics programs are helping, and companies are operating under conditions that foster detection and response more now than five years ago, according to an integrity study conducted by KPMG Forensic.

The survey also finds a nugget of good news for the insurance industry: Employees of highly regulated financial industries such as banking, finance and insurance reported lower rates of misconduct within their organizations as compared to others, with the insurance industry having the lowest rate of prevalence of misconduct out of all the industries surveyed.

In recent years, the government has enacted a wide array of reforms, including—most famously—the Sarbanes-Oxley Act of 2002, to encourage companies to be more self-governing and establish an ethics and compliance program with the goal of reducing misconduct. The KPMG Integrity Survey measures these reforms’ results.

Nearly three out of four respondents reported observing misconduct in the past 12 months, some saying the misconduct was so severe that it would cause "a significant loss of public trust if discovered." These results are unchanged from employee observations in 2000.

With the levels of observed misconduct remaining consistent, you might think that not much has changed in the new world of corporate regulation. However, while the level of observed misconduct has remained constant, employees reported that the conditions that facilitate management's ability to prevent, discover and respond to fraud and misconduct have improved since 2000. Pressure to engage in misconduct to meet business objectives has decreased, apathy and indifference toward codes of conduct have declined and confidence and comfort levels in reporting misconduct (whether through supervisors, hotlines and top management) have increased. Employees are confident that whistleblowers would be protected form retaliation and believe that their business leaders would respond appropriately to misconduct.

Employees who work in companies with comprehensive ethics and compliance programs reported more favorable results across the board than those who work in companies without such programs. At companies with ethics and compliance programs, employees reported observing less misconduct and a significantly higher percentage of employees felt motivated and empowered to "do the right thing." A significantly higher amount of employees believed their colleagues felt comfortable raising and addressing ethics concerns, and believe their CEOs and other senior executives valued ethics and integrity over short-term business goals.

The KPMG Integrity Survey 2005-2006 results are based on responses from 4,056 U.S. employees spanning all levels of job responsibility, 16 job functions, 11 industry sectors and four thresholds of organizational size.

To download the entire survey, click here.

Emily Crane (emily.crane@iiaba.net) is Big "I" media relations manager.

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P & C   T R E N D S
Industry Execs Optimistic about 2006’s Profit Potential, Weary of Catastrophes

The insurance industry is in good spirits and optimistic about the year ahead. According to an Insurance Information Institute survey of industry leaders at its recent Property-Casualty Joint Industry Forum, insurance executives have a positive outlook despite industry challenges.

"All indications are that 2006 will be a good year for the property-casualty industry assuming ‘normal’ catastrophe losses," says Robert Hartwig, I.I.I.’s senior vice president and chief economist. "However, threats abound, including the likelihood of another severe hurricane season and protracted litigation."

Insurance executives seem to agree with Hartwig’s prognosis. According to the survey, 79% say 2006 should be more profitable than 2005, based on combined ratio.

During the educational session "View From the Outside Looking In," panelists’ comments concurred with the survey’s findings. Panelist Franklin W. Nutter, president of the Reinsurance Association of America, said 2006 has the makings of a "remarkable" year thanks to premiums projected to rise 5%, a combined ratio estimate of 98 and an expected 15% return on equity.

Panelist David Schiff, editor of Schiff’s Insurance Observer, provided some context. "The key is to not get intoxicated by it," he said. "It is a cyclical business, but just because the industry is cyclical does not mean we can predict the pattern exactly. Whether it is three years, five years or 10 years in between, it will continue to be cyclical."

A hot topic at the forum was Mississippi’s wind vs. water lawsuit, with 80% of survey respondents believing the industry would prevail.

"Homeowners insurance does not cover flooding, including, but not limited to flooding as a result of high tides or storm surges," Hartwig says. "The policy language is crystal clear and unambiguous."

Survey respondents remained less enthusiastic about worker’s compensation and commercial lines; the majority expected no improvements in those two areas in 2006.

Additionally, 72% foresee 2006 as another troublesome year for catastrophes. Echoing those sentiments, panelists at a forum discussion expressed concern about the impact of another catastrophe on the industry.

Hanover Insurance Group President and CEO Frederick H. Eppinger pointed out that many companies are withdrawing from risky underwriting areas in the wake of 2005’s Hurricane Katrina. "Into this supply breach have stepped under-capitalized start-up companies, many of which could become insolvent in the event of a mega disaster," he said. "Meanwhile, the cheap rates they offer drive responsible, established carriers out of the market."

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

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C A R R I E R   N E W S
Encompass Names New President
Encompass Insurance has appointed Cynthia Hardy Young as its new president.

"Cynthia has the experience and ability to position Encompass as the carrier of choice for the independent agent," says Edward M. Liddy, chairman and CEO of The Allstate Corporation. "We are confident that Encompass will continue to grow profitably under her leadership."

She joined Allstate in 2005 as the assistant vice president of product operations for Allstate Protection’s Northeast region. She previously served as president of Allmerica Financial Group’s financial lines division and vice president of product management of The Hartford Financial Service Group’s personal lines division.

Young succeeds Douglas R. Wendt, who is retiring after 32 years.

Look for an exclusive interview with Young in an upcoming issue of IN&V.

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L & H   T R E N D S
Don’t Skip the Basics

I recently picked up a copy of legendary college basketball coach John Wooden's book "Wooden on Leadership." It’s one of the best books I've ever read, and I was struck by the similarities between a successful life-health insurance agent and a teacher. At the start of his career, Wooden was a high school English teacher. He saw no difference between being a basketball coach and being a teacher. Perhaps that is why former teachers do very well as insurance agents: They understand how to teach.

Consumers do not receive much financial education in school, so insurance agents must serve as teachers. The problem for the agent in our consumer culture is that credit cards and loans are readily available. Usually people get financial counseling after they already created a big problem. So how can an agent convince young heads of household to purchase adequate life and disability insurance and to not delay saving for long-term goals like retirement and college expenses?

Wood has an answer in his book: "In the eyes of most observers, my title is ‘Coach’ Wooden, but this is not what I would list first on my resume or business card," he writes. "From my earliest years, I have viewed my primary job as one of educating others: I am a teacher."

Think for a moment about the increasing complexity of financial products. Agents’ real challenge is to listen and understand their customers' objectives and then make a recommendation, conveying in simple terms how a product meets their needs and why the company they chose is an appropriate provider.

How many times do agents fall into the trap of using spreadsheets, policy illustrations and reams of assumptions, which overload customers? Yes, regulators believe that more information is better, and it’s good to supporting documentation. But rarely is a sale made on that basis. In fact, it can be a trap. Many consumers think that multiple quotes illustrating future results make for good comparisons but, as all good agents know, illustrations are not guaranteed. In fact, price-shopping consumers sometimes gravitate to companies that have less-than-solid financial strength. Consider the case of long-term care insurance in the early 1990s. A number of carriers provided low rates. However, LTC insurance is class rated and the current rate is not guaranteed. Too good of a deal can result in steep price increases, frustrating customers and embarrassing the agents they purchased it through. That is why educating customers about the strength and stability of an insurance carrier is critical for long- term financial products. Don’t skip over the basics, even if they seem trivial.

Even as the most-successful college basketball coach, Wooden started each season by showing his players how to properly put on their socks and tie their sneakers (he even had someone come in and measure their foot sizes rather than rely on the player's answer) so that he never had players miss a practice or a game due to blisters. New players were initially surprised, but they came to appreciate their coach's eye for detail and preparation. When agents sell a life insurance policy, do they spend adequate time explaining primary and secondary beneficiaries to customers and how insurance proceeds are distributed by contract (or through a trust, if set up) instead of by a will?

These basic concepts can help educate a prospect on the power of tax-free death proceeds and the importance of planning. There is no doubt that Wooden would have been a fantastic insurance agent. Agent would do well to learn from his example.

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

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