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                                                   Big “I” Association News

       

On the Hill
Prospects for Health Care Reform Now Up In the Air
GOP win in Massachusetts Senate race changes dynamics in Washington.

Scott Brown, a Republican state senator from Wrentham, Mass. turned the health care reform debate upside down on Tuesday evening. Brown’s upset victory over Massachusetts Attorney General Martha Coakley (D) in the special election to fill the balance of the late Sen. Ted Kennedy’s term in the United States Senate has put the prospects for passage of the current health care reform proposals in peril and left the White House and Democratic Leadership soul-searching for the best way forward.

Gone is the filibuster-proof majority of 60 votes in the Senate and as is the ability of Democrats to pass a House/Senate health care reform compromise under regular order without the help of at least one Senate Republican. Perhaps even more concerning for Democratic Leadership is the reaction from their rank-and-file members whose appetite for passing health care reform legislation, as currently drafted, is waning at a steady clip.

The following are some options for health care reform that seem to be on the table, however, the option most likely to prevail remains unclear.

1. Pass a scaled-back, bipartisan health care reform bill. The president has suggested, in private meetings this week, that he is willing to go down this avenue and there appears to be extensive support from rank-and-file Democrats as well. This option may include one scaled-back, bipartisan health care reform bill or a series of bills. This option would take cooperation from both sides of the aisle and could be difficult to achieve in the polarizing political environment. However, some consider this the most viable option.

2. The House passes the Senate health care reform bill. This is the White House’s preferred option, but it’s under fire from House Democrats and some labor unions. This option would force the House to take a difficult vote, but allow the Senate to wash their hands of the process. Moderate House Democrats, wary of the political climate, do not want to further endanger their political careers with another tough vote, and the more liberal side of the caucus is opposed to the funding mechanism included in the Senate bill. A good chunk of the funding for the Senate bill is from the Cadillac tax on high-cost insurance plans. The tax is expected to hit many union health care plans, making it a volatile issue for Democrats. One way around the issue is to ask the House to pass the Senate bill with the promise of amending controversial issues such as the Cadillac tax through a separate reconciliation bill that will only require the support of a simple majority of both chambers.

3. The House and Senate pass health care reform by using the partisan budget reconciliation process. Given the new 59-41 margin in the Senate, this option is back on the table, but it comes with great political risk. Should it be invoked, Senate Democrats would only need 50 votes from their caucus, plus a visit to the Capitol from Vice President Joe Biden, in his role as president of the Senate, to push it over the top. Aside from the political calculus, this path is very messy from a legislative perspective. In order to qualify for the reconciliation bill, a provision must be tied to revenue – either positive or negative. In this scenario, several provisions included in the current bill would be excluded from the reconciliation bill because there is no revenue associated with them. As several Senate experts have noted, a reconciliation bill would closely resemble Swiss cheese.

4. The White House and Congressional leaders decide to put health care reform on the shelf and pivot to working on economic/jobs issues. This is obviously the worst-case scenario for the White House and Congressional Democrats, but it became much more viable after Tuesday evening’s election results. According to the Rasmussen post-election poll of Massachusetts voters, 56% of voters said health care reform was the most important issue, meaning their votes were a referendum on the health care bill. Those poll numbers, along with Brown’s margin of victory on Tuesday night, will force Democrats to at least ponder this option.

Next Wednesday evening, President Barack Obama is scheduled to deliver the State of the Union Address, and he will likely prescribe a pathway forward for Congress. Stay tuned.

Joe Wall (joe.wall@iiaba.net) is Big “I” senior director of government relations.




L-H Trends
Back-to-Basics Strategy Prevails in Life Insurance Sector
Carriers and agents are re-evaluating product offerings and sales strategies.

It’s clear that the last few years have been difficult ones for the life insurance sector, with the fallout from the economic downturn taking a particularly large toll on life and retirement product sales. In 2010, the strategy for agents and carriers alike is getting back to basics, with a focus on simplifying product guarantees and benefits while cross-selling life products with property-casualty accounts.

“Rebuilding, replenishing and optimizing capital in the life insurance industry is at the top of the list for insurers in 2010,” says Doug French, managing principal of insurance and actuarial services at Ernst & Young. “The current trend is to simplify products, be more transparent and design products that meet consumer needs and consume less capital.”

According to a recent life insurance outlook report from Ernst & Young, industry surplus declined 13% from 2007 to 2008 and 2009 surplus remains flat to date. In 2010, life insurers will be monitoring risk more carefully, developing more comprehensive contingency plans and focusing on core product areas. Many carriers are phasing out or raising rates on products that put significant demand on capital, such as those with no-lapse guarantees. French also sees an overall de-risking of variable annuities and a shortening of term durations in the term insurance market. Because the industry may be entering a period of heightened interest rates, French believes companies will focus more on products like single premium deferred annuities in the coming year. Steven Brostoff, a spokesperson for the American Council of Life Insurers, also views annuities as a lucrative product for consumers who are trying to get their retirement savings back on track.

“We expect to see greater interest in annuities,” Brostoff says. “Advances in medical science and healthier lifestyles mean that Americans will be living longer than ever before. They will need to find ways to assure that their retirement savings will last a lifetime.”

Because independent agents are often held accountable for the reliability of long-term life and retirement products purchased by their clients, French says agents are demanding more from carriers in terms of transparency and reliability.
 
“A lot of distributors were embarrassed by carriers (during the financial crisis),” says French. “There will be greater demand from independent agents around risk management, financial strength and product management. Companies will have to think through risk-adjusted metrics that will let the agent understand the risks inherent to the customer.”

In a difficult sales environment, many agents are finding the back-to-basics approach is working well with leery customers. According to French, one product that fits this mold and is making a comeback is the traditional participating whole life policy from a mutual company that has a non-forfeiture guarantee and pays a dividend. For his part, Dick Langhough, national sales manager for LifeSource, a Crump company, sees cautious consumers turning toward equity index products to minimize losses and bundling life and long-term care products to save money. Langhough works with property-casualty agencies that want to maximize life insurance sales, and he says the opportunity is there for those willing to market and “mine their books.” He says most existing customers want and need life insurance products, but they may go elsewhere if their p-c agent fails to mention the agency’s offerings.

“There’s a lot of opportunity out there right now, and it is going to get simpler,” Langhough says. “We’re saying, ‘let’s get back to basics and talk about it.’”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.

Editor’s note: For more information on life-health products in 2010, read “Benefits: What’s Next?” in the January issue of IA magazine.



P-C Trends
P-C Premiums Continue to Shrink as Percentage of GDP
Historical trends show potential for further p-c pricing decline.

Is there a limit to how soft the soft market can go? According to historical property-casualty pricing and GDP levels, we haven’t hit the low point yet.

Last week, Insurance News & Views examined the soft market based on how it’s affecting independent agents, and several readers responded with observations. One reader notes that if premiums fall again in 2010, it will be the fourth year in a rowof declines. Readers are also wondering what is happening in terms of the industry’s influence on the size of the economy, and whether there is a practical limit to how far property-casualty prices can fall. Examining p-c premiums and their influence on the gross domestic product (GDP) can help answer this question.

First, GDP is measure of a country's economic output. In the United States, GDP is measured by the Bureau of Economic Affairs and includes consumption (C), government spending (G), investments (INV) and exports (iE) less imports (iM). Insurance forms a part of the GDP and is included in consumption. The formula for calculating GDP is:

                          
Consumption makes up the largest portion of U.S. GDP and the country’s GDP in 2009 was about $14.4 trillion or approximately $45,000 per person. American consumers are a major economic driver, which has been made more clearby recent attempts at economic recovery. While many would certainly like to see the insurance industry contribute and grow the economy through a rise in p-c prices, the industry is governed by the unrelenting laws of a competitive marketplace and by 2,000 insurers vying for premiums.

Consumption of p-c insurance by individuals and business is certainly a part of GDP, but how much? It turns out p-c insurance forms about 3% of GDP which has grown from a low of 1.4%, after the Great Depression, to a high of more than 4% in the mid-1980s. However, insurance plays a much bigger role as a portion of the services economy. Overall services make up about 45% of GDP and p-c insurance is about 10% of services. Services are an increasing part of the economy, making up 10 percentage points more of GDP than they did in 1980.
 

           
 
There are two notable trends in the graph. First, while p-c premiums have recently shrunk as a percentage of GDP, they are nowhere near their nadir in 1944 of 1.4% of GDP. Second, the last three market cycles are pretty evident, withpeaks in the late 1970s, mid-1980s and in the first part of the last decade. However, the last three market cycles are nothing compared to the whip-saw cycle that occurred after the Great Depression. 

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

In the States
Independent Agents Voice Concern with N.Y. Comp Disclosure Proposal
Insurance industry awaits a final decision as comment period ends.

The public’s opportunity to weigh in on New York’s sweeping and unprecedented producer compensation proposal came to a close last week, and independent insurance agents who reside in the Empire State or sell policies there now anxiously wait as regulators determine what happens next. 

After floating a variety of compensation disclosure proposals over the last two years, the New York State Insurance Department finally published its proposed regulation in early December and initiated a notice-and-comment period that ended on Jan. 15. More than 2,200 comments were submitted during the 45-day comment period. Both the Independent Insurance Agents & Brokers of America and the Independent Insurance Agents & Brokers of New York submitted comments expressing serious concern with the expansive regulation and urging the department to withdraw the proposal (or to, at a minimum, make significant changes). 

The insurance department’s proposed regulation would require agents and brokers to make a series of prominent written disclosures to every purchaser of insurance prior to or at the time of application (and retain copies of the documents for at least three years). The producer would be required to disclose (1) whether he/she represents the purchaser or the insurer in the transaction, (2) that he/she will be compensated by the insurer for the sale of insurance, and (3) that the compensation received varies from company to company and from policy to policy. The proposal - which applies to both new placements and renewals - would also require the producer to inform the purchaser that information about the source and amount of compensation to be received and any alternative quotes presented may be requested by the purchaser at any time. If this information is subsequently requested by the buyer, then the producer must provide descriptions of the “nature, amount, and source of any compensation to be received” and “any alternative quotes presented,” including information explaining the differences in coverage, premium, and compensation under each of the alternatives.

The Big “I” continues to question why New York State has so adamantly pursued the implementation of these sweeping disclosure obligations and excessive compliance burdens, especially at a time when small businesses already face extraordinary pressures. The regulation would impose unnecessary regulatory costs and burdensome new compliance obligations on the millions of insurance transactions that occur in New York every year, yet no rationale or justification for this onerous and prescriptive regulation has ever been presented. In the eyes of most observers, this is a classic example of a regulatory solution in search of a marketplace problem. 

In its nine-page comment letter, the Big “I” noted: 

• Any governmental action as sweeping as this proposed regulation should provide clear, tangible and meaningful benefits to consumers, and those benefits should outweigh any new costs and marketplace consequences. The insurance department, however, has never thoroughly identified and analyzed the negative effects this regulation will have on the private sector and consumers. The reality is that the regulation will impose clear burdens on insurance producers without producing countervailing benefit.

• The insurance department has suggested that compliance with the regulation will be very easy for agents, but the regulators fail to appreciate the complexity of the mandates. The proposed disclosures would be transaction and customer-specific in many instances (thus eliminating the possibility of using a boilerplate form) and would likely require the assistance of outside legal counsel.

• The insurance department’s addition of the so-called “representation disclosure” provision in later drafts is especially problematic. Such a requirement is subjective, difficult for producers to comply with, and likely to convey misleading information to buyers.

• While earlier drafts applied equally to all insurance providers, the latest version inexplicably eliminates that parity by exempting “any salaried employee of an insurance company who does not receive incentive-based compensation.” The selective application of this regulation to only certain distribution channels is unfair and unjust, will create an uneven playing field, and places the burdens and costs of this regulation squarely on the backs of small businesses. 

• There has been considerable speculation in both industry circles and in the mainstream press concerning a possible link between the promulgation of this new regulation and the ongoing efforts of certain mega-brokers to be released from their regulatory settlements, and countless main street agents would be concerned if this regulation was somehow a component or condition of that release. 

• No other jurisdiction has implemented a government-mandated disclosure regime of this nature, and the promulgation of the regulation will place New York State decisively outside of the regulatory mainstream.  The adoption of these unique and anomalous requirements will increase regulatory costs for producers who operate in New York, reinforce notions that the state is a difficult regulatory environment and undermine ongoing efforts to achieve greater interstate consistency in insurance regulation. 

• In defending its proposed regulation, the insurance department has suggested that it (1) applies to all insurance providers and does not impose any adverse or disparate impact on small businesses, (2) imposes the least possible burden on insurance producers and (3) may be complied with through the issuance of uniform boilerplate forms and oral disclosures. Unfortunately, none of these critical assertions is accurate – and the insurance department has dramatically underestimated the compliance costs, paperwork and record retention obligations, and adverse effects this proposal creates for small businesses. 

In the coming days and weeks, the New York State Insurance Department will review the comment letters received and consider its next steps. The department could elect to move forward with the regulation in its current form, revise the proposal in some manner or withdraw it altogether. Unless critical revisions are made, however, it is almost certain that the regulation will be challenged in the courts. Many industry and legal observers question the legality of such a regulation and doubt that there is a proper statutory foundation for establishing such mandates. While insurance regulators have the power to enforce and (within limits) to interpret the law, many assert that they do not have authority to engage in lawmaking and policymaking of this magnitude. The Big “I” is already exploring its legal options and is prepared to initiate a court challenge to the regulation if the department implements this proposal without important changes. 

Click here to read IIABA's comment letter, and click here to read IIABNY's comment letter.

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.

On the Hill
Big “I” Sends Letter Supporting Modernization of S Corp Rules
Letter urges Congress to support bipartisan bill.

Yesterday, the Big “I” joined forces with other small business trade associations in a letter to Congress urging them to support a bill titled the “S Corporation Modernization Act of 2009.”

Many of the rules that govern the day-to-day management of S corporations were established more than half a century ago and this bill aims to provide necessary updates.

The bipartisan legislation was introduced in the Senate as S. 996 by Senators Blanche Lincoln (D-Ark.) and Orrin Hatch (R-Utah). Representatives Ron Kind (D-Wis.) and Dave Reichert (R-Wash.) introduced the companion bill, H.R. 4840, in the House.

The bill’s goals include: increasing access to capital by S corporations by reducing S corporation ownership restrictions; easing punitive restrictions that apply to converted S corporations and punish the unwary and encouraging philanthropy by S corporations.

The legislation is hailed by the Big “I” as a step in the right direction in helping the nation’s current economic challenges. The letter says, “These outdated rules hurt the ability of S corporations to grow and create jobs. Many family-owned businesses would like to become S corporations, but the rules prevent them from doing so. Other S corporations are starved for capital, but find the rules limit their ability to attract investors or even utilize the value of their own appreciated property.”

The Big “I” was the only insurance producer group to sign the letter.

Click here to read the letter sent to the Senate, and click here to read the letter sent to the House. 

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.