T H U R S D A Y ,  F E B R U A R Y   5 ,  2 0 0 9 

 Big “I” National News

In the States
New York Unveils Producer Compensation Disclosure Proposal
Draft regulation expected to generate controversy.

There is perhaps no issue that stirs the emotions of the insurance world more than the long-running debate over producer compensation and contingent commissions, and the latest twist occurred yesterday when the New York Insurance Department released a draft disclosure proposal that would apply to all independent insurance agents and brokers doing business in the Empire State. If ultimately implemented in its current form, the department’s proposed regulation would institute a new and unprecedented compensation disclosure regime on the independent agency system.

Every agent and broker in the industry remembers how former New York Attorney General Eliot Spitzer uncovered a bid-rigging scheme involving Marsh Inc., AIG and other prominent names in the industry and used these allegations to somehow suggest that the receipt of legitimate incentive compensation by main street producers created an inherent conflict of interest. In the wake of Spitzer’s allegations, several mega-brokers and large insurers entered into legal settlements that prohibited them from receiving or paying nearly every form of incentive compensation. As the wrongdoers involved in these bid-rigging schemes were appropriately punished, state policymakers across the country concluded that imposing sweeping compensation disclosure requirements were not warranted and the debate subsided.  The lone exception to that generalization has been New York, where discussions of agent and broker compensation have continued to percolate in recent years. 

The department’s new disclosure proposal – which specifically exempts captive agents from its scope – is sweeping in nature and includes many elements. The core provisions would require independent agents to prominently and in writing describe “the nature and amount of compensation to be received by the producer in connection with the sale” of an insurance policy.  An agent would be required to disclose either the dollar amount or percentage of premium to be received, and, in the event that the amount of total compensation is unknown at the time (as in instances where the agent is eligible for incentive compensation), the agent must also disclose the “method of calculating the compensation, including the factors on which compensation is based.” In addition, the proposal would ambiguously require agents to “provide comprehensive information about (all) quotes solicited and received,” including company and policy-specific information for each alternative quote. Any violation of the regulation would be considered an unfair trade practice. 

It should be highlighted once again that the draft proposal is not final and has not been implemented. The insurance department is expected to continue vetting and considering the proposed regulation, and it is unclear at this stage whether it will ultimately be promulgated in its existing form, revised to some extent or discarded altogether. 

The current draft is likely to be controversial and received with concern and hostility by much of the industry, and questions about the necessity and purported consumer benefit of the proposal, its broad scope and the costs and complexities of compliance will certainly arise. No state has previously contemplated the type of requirements outlined in the draft, and the proposal goes well beyond model laws developed by the National Association of Insurance Commissioners and National Conference of Insurance Legislators several years ago. It is also likely that some will also question the legality and appropriateness of a regulator imposing this type of expansive new requirement, especially since two recent New York appellate court cases suggested that there is no common law or statutory duty to make such disclosures. 

The Big “I” and New York association will participate in the ongoing discussions concerning the proposal and represent the interests of agents and brokers across the country. 

Wes Bissett (wes.bissett@iiaba.net) is Big "I" senior counsel for state government affairs.


 


In the States
Regulators Choose Not to Loosen Life Company Capital Standards
NAIC leadership votes down industry request, 16-1.

Late Thursday, the National Association of Insurance Commissioners (NAIC) voted not to approve a series of controversial revisions to the capital and reserve requirements of life insurance companies. The outcome of the highly-anticipated vote, which was the subject of intense life industry lobbying and mainstream media coverage, was a surprise to many.  

The debate over whether to lower life company capital standards and to address other solvency-related requirements began in November when the American Council of Life Insurers brought a package of nine proposals to the NAIC. The life industry’s objective was to provide balance sheet relief to life companies and to, in their view, revise unnecessarily conservative reserving requirements and gain access to “trapped capital.” The NAIC turned the proposals over to a series of technical groups that ultimately recommended regulators take action on six of the concepts (with certain amendments, revisions or modifications). 

Many observers expected that the approval of the working groups would result in adoption of the changes, but the final package was soundly defeated by a 16-1 vote when considered by the NAIC’s Executive Committee last week. Opponents of the measure – including consumer advocates and the National Conference of Insurance Legislators – questioned the merit of the changes and the haste of the deliberations and suggested that some in the industry were using the ongoing financial crisis to rationalize the implementation of long-desired reserving changes.  These critics maintained that the package would have the effect of weakening solvency requirements and consumer protections at the very time when they are needed most.  

During Thursday’s discussion of the proposal, regulators expressed concern with the timing and scope of the proposed changes and noted that the media and other key voices would likely view any changes as anti-consumer. Several commissioners noted that strong solvency protection was ensuring the continued strength of insurance companies at a time when major institutions in other financial sectors have failed or floundered and that regulators could address problems with specific life insurers on an individualized basis. The sentiment was expressed, for example, by NAIC President and New Hampshire Insurance Commissioner Roger Sevigny, who noted that “(t)he insurance industry is in much better condition than most of the rest of the financial services sector because of strong state solvency regulations.  ”

Although the NAIC opted not to approve the industry’s request, the commissioners will continue to closely monitor the strength and solvency of life insurers. In addition, the NAIC is expected to more thoroughly study and perhaps implement a narrower and more targeted set of revisions to solvency rules and related requirements over the months to come.  

Wes Bissett (wes.bissett@iiaba.net) is Big "I" senior counsel for state government affairs.





On the Hill
The Hartford’s Neal Wolin to Work for Obama Administration
Company bids farewell to an eight-year p-c veteran, names temporary replacements.

Neal Wolin, president and chief operating officer of property and casualty operations at The Hartford, recently accepted a position in President Barack Obama‘s administration as deputy counsel to the president for economic policy and deputy assistant to the president.

Wolin, who joined The Hartford in 2001 as executive vice president and general counsel, became the company’s president and chief operating officer of p-c operations in June 2007. He served the U.S. government in several capacities prior to joining The Hartford, including deputy legal adviser to the National Security Council, executive assistant to the national security advisor and general counsel of the Department of the Treasury.

“It has been an extraordinary privilege to be a part of The Hartford’s leadership team and the company’s nearly 200-year history,” says Wolin. “I have great confidence in the future of the property and casualty operations and have no doubt that the strategies and initiatives we have put in place effectively position the business for success.”

 A search for Wolin’s successor is underway; in the meantime, The Hartford has named Juan Andrade and Jonathan Bennett as interim co-leads of the company’s p-c operations. Andrade assumed leadership of The Hartford’s p-c claims operations in 2006 and is currently executive vice president of sales and distribution for p-c operations. Bennett joined The Hartford in 1999 as a staff assistant to CEO Ramani Ayer. He is currently executive vice president of personal lines and small business insurance.

Ayer says The Hartford is disappointed to lose a “wonderful colleague” and “outstanding leader” in Wolin, but is confident in its strong p-c team.

 “President Obama is building an outstanding economic team to address the many complex challenges facing the nation and our financial system,” says Ayer. “We recognize the unique call to service this presents for Neal and wish him all the best in his return to Washington.” 

Wolin welcomes the opportunity to meet the nation’s challenges head-on in his new position.

“Given the importance of the issues facing the country, there is no greater honor than being called to serve,” he says. “I am looking forward to being part of the president’s team of advisors in this most challenging period.”

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


L&H Trends
Protecting Against Investment Fraud
Agents should urge caution in investment practices.

The recent financial crisis continues to generate bad economic news for the broader economy.  The Wall Street Journal reported that the U.S. economy turned in its worst performance in a quarter-century in the closing months of 2008, and the current months could be even worse. The gross domestic product (GDP), a gauge of the nation's output, fell at a 3.8% annual rate in the fourth quarter, adjusted for inflation, from the previous quarter. The decline was the largest since 1982, though still well below the postwar record 10.4% quarterly drop in 1958. Clearly, with the drop in GDP and the increasing and alarming rate of job reductions, it appears that 2009 will be another difficult year. But aside from all the bad economic news there is another casualty: consumer distrust in financial institutions and financial advisers.
 
By now, everyone has learned about the massive Ponzi scheme perpetrated by Bernard Madoff. What is still inconceivable is the scale of fraud that occurred --- reported to be as much as $50 billion --- and the fact that the victims were all naive or unsophisticated investors. In fact, the list of victims includes many well-known, successful business people: Fred Wilpon, owner of the New York Mets; Norman Braman, former owner of the Philadelphia Eagles; Leonard Feinstein, co-founder of retailer Bed Bath & Beyond; J. Ezra Merkin, GMAC chairman; and The Elie Wiesel Foundation.
 
Aside from prominent business people, many sophisticated investment professionals were also taken for millions of dollars. Former Merrill Chief Executives Daniel Tully and David Komansky, along with former Merrill Investment-Banking Chief Barry Friedberg, personally invested in hedge funds with Madoff exposure run by former Merrill Brokerage Chief John "Launny" Steffens, according to individuals familiar with the matter.  Clearly, Madoff's long history and impressive accomplishments in financial circles, and his involvement with the financial market NASDAQ, led many savvy people to invest without due diligence. However, the reality is that Madoff was not the only one preying on the public.  Federal and state authorities are reporting a growing number of financial scams that echo the alleged Madoff fraud, as strapped investors seek access to their cash amid increasingly hard times. At least six suspected multi-million dollar fraud cases emerged in January alone, many of them alleged Ponzi schemes in which investors were lured by promises of lofty returns, but are actually paid off from new victims' funds. Last Tuesday, authorities arrested Arthur Nadel, the missing Florida hedge-fund adviser, who was accused by federal authorities of defrauding clients of millions of dollars.
 
So, the question becomes how can investors protect themselves from these sophisticated criminals? Examining a key part of the Madoff Ponzi scheme --- the fact that investors received their investment statements from a trading firm he controlled --- reveals the best way for consumers to avoid these types of scams. Investors should always insist on receiving independent verification from a third party regarding the value of their investments. This means that in addition to receiving a regular statement from the investment manager, the investor should receive (or be able to verify online directly from the third party) a statement from a bank, insurance company or brokerage account (not connected to the investment manager) and a listing of their account activity directly mailed from the third's party office. Investors should even verify the postmark. In other words, investors should expect to receive independent verification from a separate business not connected in any way to the investment manager. Further, the investor should determine who audits the investment manager's operations, and who audits the third-party custodian of the investment holdings. Investors should also not give the investment manager permission to withdraw funds without having the investor separately complete a withdrawal form. 
 
Lastly, investors should remember that if they are receiving investment returns that cannot be explained or receive vague answers to specific questions, they should not be timid about getting verifiable answers from the investment manager. Now more than ever, insurance agents and investment brokers should take the time to relieve any concerns their clients may have, as the public tends to paint with a broad brush.  
 
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.


Agency Management
The Retention Myth
Customer service is not always the force behind good retention.

I have polled hundreds of insurance agents about their competitive advantage and about 90% to95% have responded that their competitive advantage is "great service." When asked how they know great service is their competitive advantage, a popular response is, "Well, if we didn't have great service, our retention rate would not be so high."

The belief that high retention is indicative of great service is a dangerous siren. We want to believe that if customers didn't like us, they would leave. Unfortunately, retention rates sometimes lead agents down a course of deception. Customers typically stay with an agency for many reasons other than good service. In fact, very little correlation exists between retention and customer service.

I recently heard an experienced buyer of insurance agencies speak about why his company chose certain agencies over others to purchase. Initially he used retention rates to judge good agencies from poor ones, but with time and many acquisitions, he learned good agencies and poor agencies have similar retention rates. Regardless of agency quality, retention rates typically fell within the very narrow range of 87% to 92%.

My own experience is similar. I have visited very poor agencies, average agencies and great agencies, and their reported retention rates never differed significantly from the 87% to 92% range. Retention rates are simply poor indicators of good service or satisfied customers.

If good service doesn't keep retention rates high, what does? One reason is few agents are asking customers for their business, so customers tend to stick with their current agent even if their current agent provides poor service. Other than call-ins, walk-ins and lucky breaks, not much new business gets written in many agencies. If no one is pulling customers away, customers do not leave (unless the current agency really screws up). The result? High retention rates.

Suppose an agency is actively soliciting business from other agencies. What is required to steal a customer away? Most producers say they need a 10% price advantage to get a new customer (all else being equal). Since a consistent 10% price advantage rarely exists, it is the exception to convince a customer to leave. Therefore, again, retention is not indicative of great service. It is more indicative that your price is less than 10% higher than the competition's.

The solution is to use more specific measurements. One example is referral percentages. A superior agent should achieve a 25% referral ratio. For example, if a producer has 100 accounts, they should get 25 referrals and write at least 50% of them. Another great example is a customer satisfaction score on customer surveys. Customer loyalty is another measurement. How loyal are your customers? Download the Loyalty Acid Test at www.loyaltyrules.com to find out. Or check out these articles in the Virtual University research library’s customer service tests and customer satisfaction surveys.

Using retention as a management tool to indicate customer satisfaction will often lead agents to a cruel end. True indicators take more work to identify but are worth the effort. Track your referral rate, track your customer satisfaction scores, know your customer loyalty and sail home to victory.

To read the entire article, click here.

Chris Burand (chris@burand-associates.com) is the president and owner of Burand & Associates, LLC.