T H U R S D A Y ,  J A N U A R Y   2 4 ,  2 0 0 8 

Big “I” National News

VIEW: P&C Trends

P-C Premiums Cast Light on States
A look at how premiums and populations vary by state.

State comparisons are always interesting, and looking at a state’s proportion of total p-c premiums and state populations is no exception. The media routinely discuss which state populations are growing the fastest, but how states compare to each other in p-c premiums is not often mentioned. What is rarely looked at outside of actuarial circles and insurance company board rooms, however, is how the two compare.

Below is a graph of three large states and the percentage of the total U.S. population they represent, along with the percentage the state represents of total p-c direct written premiums.



It’s important to be cautious in drawing conclusions about such broad measures, as there are likely to be many reasons that add up to make the totals. But there are some broad observations are pretty safe.

In California, it is interesting to see how the state share of premiums increased faster than the  Golden  State’s share of population for several years, but recently that appears to be lessening. In looking at Florida premiums and population, the graph makes it clear why Floridians can’t open a newspaper or turn on a television set without reading the word “insurance.”   While the population in Florida has been one of the fastest growing in the county, the state’s share of premiums grew even faster. Turning to Ohio, there is a population and premium picture that could not be more different than Florida. Ohio’s share of total population is steady or falling slightly year-to-year, but perhaps the most startling is the fall-off in premiums. Total premiums in the state are driven by a multitude of factors, but clearly the attention being focused on catastrophes generally and Ohio’s relative general lack of catastrophe exposures would seem to be behind at least some of the fall in Ohio resident’s relative premiums.

Interested in seeing your state’s premium to population comparison? E-mail paul.buse@iiaba.net. IIABA will gladly provide the information to members.

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




P&C Trends

Compensation Comprehensive
Contingent commissions still a factor in brokers’ compensation practices.

Watson Wyatt Worldwide, a compensation and benefits analyst group, released a report earlier this month, “2007/2008 Survey Report on Compensation Polices & Practices in the Insurance Industry,” and found that 98.3% of the organizations participating in the survey granted a salary increase in 2006.

According to the report, the average raise given to those in the industry has steadily climbed from 4% of an employee’s salary in 2006 to 4.1% in 2007. The report estimates raises will continue on an upward trend, reaching an average of 4.2% in 2008. The industry is still not completely rid of contingent commissions and it is affecting the outlook for some brokers.

Following the investigation, many brokers have shied away from contingent commissions, but according to Fitch Ratings “Review and Outlook 2007-2008” these commissions are still a factor when it comes to compensation.

“Despite efforts to eliminate contingent commissions, they are not dead. Facing a soft market and pressures to increase brokerage revenue growth, brokers continue to look for ways to receive variable commissions from insurers, and insurers and brokers differ on whether they approve,” says the review. “Fitch believes that the major brokers are finding ways to incrementally increase revenue in the absence of contingent commissions, albeit in different forms and to varying degrees. Fitch expects this trend to continue as the soft market shows no sign of reversing in the near term, and brokers are increasingly pressure to improve their top and bottom lines.”

In the report, Fitch examines three brokerages, Aon, Willis and Marsh & McLennan. In a teleconference held by Fitch on Jan. 15, Aon and Willis both received positive outlook reports, however, Marsh & McLennan’s “instability creates more uncertainty in the rating” following the New York attorney general suit. Additionally, last August, the company announced its intention to amend (for a second time) the 2004 settlement it made with the New York attorney general to include new fees charged to insurers for services it provides to customers, which has also affected its rating.

While the collection of contingent commissions has fallen by the wayside with more large brokers, fees for acting as a managing general agent/underwriting manager are now acceptable under an amendment to the New York attorney general’s settlements. Yet all three brokers in Fitch’s analysis have also started collecting an additional fee similar to contingent commissions.

“…Aon, MMC (Marsh & McLennan) and Willis have started asking insurers for an additional fee, generally 2.5% on business that brokers place in the United Kingdom. These fees are fixed and fully disclosed to customers, who may ask the broker to eliminate the fee. To date, only MMC has introduced the fee in the United States, and only to its middle market and small commercial customers. Because the commission is not dependent on profitability or other factors, MMC contends that it differs from traditional ‘contingent” commissions’,” says the report.

Aon and Willis have rejected a new “supplemental commission” compensation model, introduced by Travelers Insurance Cos. and Chubb Corp. Marsh & McLennan has yet to take a position on the issue, but Fitch says there could be implications with this kind of commission.

“These commissions may be fixed, or ‘value based’,but Fitch believes brokers should be prudent in adopting any additional commission structure, for fear of recreating old problems with transparency, disclosure and conflicts of interest,” says the report. “Fitch recognizes that incremental revenue streams are especially appealing during a soft market cycle. However, brokers should remain keenly aware of how these fees re perceived by their clients and regulators.”

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




P&C Trends

The Five-Year Hurricane Forecast
More hurricanes making landfall predicted over the next five years.

Hurricane activity in the Atlantic is expected to remain well above average over the next five years, according to Risk Management Solutions (RMS).

RMS recently confirmed that its modeled hurricane activity rates for 2008 to 2012 will remain similar to the last two years, during which the average risk of a hurricane making landfall in the Atlantic has been “significantly above” the average long-term risk.

Seven experts from around the world assisted RMS in developing the five-year outlook after reviewing a range of statistical models on potential hurricane activity in the Atlantic. Experts were asked to weigh the various models and give their best estimate of hurricane risk for the next five years.

RMS estimates the average insured losses will be 40% higher than those predicted by the long-term mean of hurricane activity for the Gulf Coast, Florida and the Southeast. Losses are expected to be 25 to 30% higher in the mid-Atlantic and northeast coastal areas.

“Although U.S. hurricane-related losses have been low since 2004 and 2005, it was apparent from the views expressed among the experts that we are still in a period of elevated hurricane activity that started in 1995, and that this is likely to continue for at least several more years,” says Claire Souch, senior director of model management at RMS. “However, there remains disagreement and uncertainty about what is driving the change in hurricane frequency, with some researchers believing it is mainly due to natural cycles in oceanic circulation and others arguing it is primarily caused by human-induced climate change.”

The 2007 hurricane season produced 14 named storms, close to the annual average of 14.7 storms since 1995, which has lead to questions about the accuracy of long-term projections. According to AIR Worldwide Corporation (AIR), which models the risk of natural catastrophes around the world, predicting long-range hurricane activity by using Atlantic basin activity as a proxy for landfall activity can “lead to erroneous estimates of both landfall risk and potential insured losses.” Instead, AIR researchers say factors including storms’ starting point, sea surface temperature, water depth, wind shear and atmospheric steering play a bigger role.

“The seasonal forecasters correctly projected that a higher-than-average number of tropical storms would form in the (Atlantic) basin in 2007,” says Peter Daily, director of research in atmospheric science at AIR. “But it’s much more difficult to predict not only how many of these storms will become hurricanes, but more importantly how many will make landfall as hurricanes. Like many past seasons, the 2007 season showed that an elevated number of tropical storms does not always translate to more hurricanes or more land-falling hurricanes. In 2007, sea surface temperatures were not as warm as some scientists expected and significant wind shear suppression by La Nina did not materialize as they had anticipated. Clearly there’s a danger in assuming that one or two storm seasons are indicative of a paradigm shift in hurricane risk.”

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




L&H Trends

Plunging Stocks
Help customers deal with the dip in the market.

There is no doubt we are in the midst of a “bear market,” a stock market that has dropped at least 20% or more. From the market high of last year, the S&P 500 is off nearly 17% and clearly there may continue to be a downdraft. In fact, the Federal Reserve took a fairly extreme measure this week by reducing the overnight borrowing rate banks are charged from 4.25% to 3.5%. While that should serve as a circuit breaker, the reality is that there are a number of other factors creating the bear market.

The reason the Fed put off reducing interest rates was a corresponding concern over inflation. Consumers are reeling from high energy prices, increased unemployment numbers and mortgage interest resets for some homeowners that will still go up, even as short term interest rates decrease. As we sit here today, the person who benefited from the increase in the value of their home, mutual funds in their 401(k) plan and other savings, is feeling poorer as they hand back some of their “unrealized gains.” It’s important to note that most of the impact from the stock market and housing prices relates to unrealized gains (except for people who recently invested in stocks or purchased their home). Housing prices and the stock market reflect long-term horizon investments and short-term fluctuations (weekly, monthly or even on an annual basis) aren’t as meaningful. It’s human nature to be disturbed by falling prices, but if the investor’s timeframe is long term and not short term they should view cloudy economic times as a necessary consequence of getting healthy, long-term investment results.  

The key to reducing exposure to lousy economic times is diversification. Any individual company stock can indeed become worthless, but if an investor has a broadly diversified portfolio, they will be subject to systematic risk (the overall risk of the market) rather than an unsystematic risk (the risk of any particular stock or investment).  Diversified investors will be concerned, but not worried by rough economic waters.  When it comes to housing, it may be difficult to diversify but the reality is that if an individual is “house poor,” meaning that all of their discretionary income is tied up in their mortgage, then they will be more concerned by falling housing prices. However, unless someone has purchased a home in an area that has had devastating employer migration or severe natural disaster exposure, the reality is that over time their house or condo price will bounce back and they will be fine. Purchasing a house/condo is not an investment --- it involves quality of life, commuting times, schools, etc. and should be viewed as a major lifestyle decision.  

The economy’s rough sledding will definitely impact independent insurance agents and their agencies. First, discretionary spending will be pinched and consumers will be tempted to cut back on insurance expenses --- letting life insurance policies lapse, reducing limits on auto policies and getting behind on their premium payments. It will be important for the agency and carriers to monitor activity to alert and “resell” policyholders on the need for risk transfer so that they don’t make a short-sighted decision to save some money and leave themselves exposed to catastrophic casualty expenses. For agencies that offer financial products such as variable life insurance, mutual funds and variable annuities, it is times like these that ongoing financial education really pays off.

This is not the first time the economy has hit a difficult time, and it won’t be the last. Again, broad diversification of holdings is very important to weathering the storm so that clients are not disproportionately affected by certain market sectors --- such as financial institutions like banks which have been bruised by subprime mortgages.

Agents can help their customers by reminding them to look at the long-term view and not panic and lock in losses. The media thrives on projecting negative news --- consumers need to be reassured.

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




Forms & Substance

To Send or Not to Send
Should agents send certificates to insurers?

An insurer recently sent its agency force a “Good News” bulletin advising that it was no longer necessary to send it copies of most certificates of insurance. The bulletin also pointed out that it was the agent’s responsibility to notify the certificate holder of cancellation. What should agencies do when a carrier tells them not to send copies of certificates? This question was recently raised by a member agency:

“One of our companies doesn’t want us to send them copies of the certificate of liability insurance. My question is two-part:

1) The certificate of liability form states the ‘issuing insurer will endeavor’ to notify the certificate holder of cancellation. How can the agency be held responsible for notification for what is stated clearly the carrier's responsibility?

2) If the company doesn’t want a copy of the certificate, why should the agency start notifying certificate holders?

Should agencies assume the responsibility of what is the carrier’s duty? Does the agency have a legal exposure? If yes, then how do you suggest agencies respond?”

In general, E&O carriers recommend agents not provide notice of cancellation to insureds, mortgagees, loss payees, certificate holders or anyone else. Cancellation is the dissolution of a contract. The parties to the contract are the insured and insurer, not the agent. Ancillary parties either have a contractual right of notice under the policy (e.g., mortgagees and some loss payees) or they don’t (most certificate holders, even if additional insureds). Only a party to a contract can cancel it and that party is the one charged with the responsibility of notice.

An E&O carrier representative and attorney participating in a recent teleconference on this issue advised regardless of the carrier’s directive that certificates should be copied to the insurer. The certificate says the insurer, not the agent, will endeavor to provide notice of cancellation. Without a copy of the certificate, that would be impossible and issuance of the certificate would appear to be a sham. In a court hearing, how would it look if the plaintiff’s attorney accuses the carrier and agency of fraud or misrepresentation for making a claim they clearly had no intention of complying with?

In general, since the parties to the contract are insurer and insured, agencies should not be sending out cancellations to anyone. If it’s absolutely necessary, then everyone should be getting such notices. Agencies should insist on hold harmless agreements with carriers who do not intend to comply with certificate provisions that they will endeavor to provide notice of cancellation.

There is an article on the Virtual University called “Certificates and Court Cases” that outlines a number of situations where agents have been found liable for activities involving certificates of insurance. For example, in Marlin v. Wetzel County Board of Education, 569 S.E.2d 462 (West Virginia Ct. App., 2002): “(T)he insurance company asserted that it never received the certificate of insurance or any other document suggesting the insurance policies needed to be amended” to make the board an additional insured.

“(The insurer) does not dispute that its agent issued a certificate of insurance listing the Board as an additional insured. Instead, (the insurer) argues that it had no knowledge of the certificate’s existence, and therefore could not modify the actual policy to include coverage for the Board,” according to the court.

Ideally, agents should continue to provide copies of certificates to insurers and insurers should “endeavor to” provide notice of cancellation to certificate holders. The alternative is for insurers to provide agents with an ironclad hold harmless agreement that will defend and indemnify agents for claims or suits involving certificates issued on behalf of parties insured by such carriers.

To read the entire article, click here.

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