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AIG Settles with Federal and State Regulators | LTC Pros and Cons of Proposed Deficit Reduction Act |  Wooley Resignation Signals Party Change in Louisiana |  Safeco Names LaRocco President, COO |  Risk Management 101: ATV Exposure Risk |  Nip Problem Employees in the Bud | Big "I" National News

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
AIG Settles with Federal and State Regulators
Agreement Addresses AIG’s Compensation of Agents and Brokers

AIG today entered into a series of legal settlements with federal and state regulators that largely bring to an end the investigations of fraud, bid rigging and improper accounting that have embroiled the world’s largest insurer for many months. Agreements were reached with the New York Attorney General and Insurance Department, the Securities and Exchange Commission and the United States Department of Justice.

The announcement is the most recent chapter in the insurance scandal that began in October 2004 when New York Attorney General Eliot Spitzer uncovered a bid-rigging scheme involving Marsh Inc., AIG, and other prominent names in the industry. The AIG investigation, which has been front page news in the insurance world, later turned to other alleged wrongdoings at the company and resulted in revelations regarding the carrier’s accounting, financial reporting and governance practices. While today’s settlements bring an end to the lawsuit filed against AIG in May 2005 by Spitzer and the Insurance Department, it does not resolve the cases against Maurice R. "Hank" Greenberg, the company’s former chairman and chief executive officer, or its former chief financial officer.

Under the settlements, AIG agreed to pay more than $1.6 billion in restitution and penalties. The agreements provide that $800 million will go to investors deceived by false financial statements, $375 million will go to excess casualty policyholders harmed by bid rigging and $343.5 million will be given to the states affected by the company’s underpayment of workers’ compensation premium taxes, residual market assessments and other related fees. The State of New York and the SEC each assessed fines of $100 million as well.

The New York settlement also includes several noteworthy provisions that affect AIG’s agent and broker compensation practices, including the payment of contingent commissions. The company will develop a new consumer Web site that outlines the "nature and range" of its compensation to producers by insurance product and, in the future, AIG policyholders will receive a notice describing the Web site and providing other information about compensation practices and policies. Both the Web site and the notice must be pre-approved by the attorney general. AIG will pay no contingent commissions in excess casualty lines through 2008, and it also agreed to stop paying such incentive compensation for any line of insurance where insurers with 65% of the nation’s gross written premiums (including captive agency and direct writing companies) do not do so as well. In addition, AIG promised to support legislation and regulations that prohibit the payment of contingent commissions, as well as new requirements that mandate greater disclosure of compensation.

It is unknown at this time whether similar settlements will be reached with other leading insurance companies, but Spitzer (who is currently running for governor in his home state) and others might use the new AIG agreement as a model. The AIG settlement does not appear to affect the life- health operations of the company, and the contingent commission provisions appear have the most direct effect on independent agent and broker distribution channels.

In response to the settlements, Spitzer said, "AIG was and is a solid company that didn't need to cheat. It finds itself in this position solely because some senior managers thought it was acceptable to deceive the investing public and regulators. However, by changing management, implementing reforms and providing restitution to injured investors, customers and states, the company has placed itself on a path toward resurgence."

AIG did not admit or deny the allegations Spitzer and others leveled, but the company did issue public statement that said the carrier "regrets and apologizes for" the conduct that prompted the investigations and the settlement and that "[p]roviding incorrect information to the investing public and to regulators was wrong and is against the values of [the] current leadership and employees."

Wes Bissett (wes.bissett@iiaba.net) is Big "I" senior vice president, government affairs and state relations

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L & H   T R E N D S
LTC Pros and Cons of Proposed Deficit Reduction Act
Did you know the act has insurance implications?

One of the federal government’s biggest challenges is entitlement (Social Security, Medicaid, etc.), which grew 8% this year when the first wave of baby boomers reached age 60. Federal expenditures will continue to rise well in excess of inflation. Last week, the U.S. House of Representatives passed the Deficit Reduction Act by a 216 to 214 vote. The Senate already passed the bill, and President Bush has indicated that he will sign it into law when it reaches his desk. Of special interest to independent agents who offer long-term care insurance is a provision that deals with Medicaid’s reimbursement of LTC expenses.

The bill affects LTC in two significant ways. First, it lengthens the so-called "look back" rule. Currently, individuals who apply for Medicaid long-term care, such as nursing home care, are ineligible if they transferred certain income and assets to others for less than their value within the past three years. This measure lengthens this look-back period from three to five years. It also expands the types of asset transfers that can disqualify individuals from Medicaid benefits. For example, a state could choose to exclude new Medicaid applicants with more than $500,000 in home equity (unless a spouse, for example, still lives there). Under current rules, homes generally do not count as assets that affect Medicaid eligibility. This makes it even more difficult for seniors to "spend down," i.e. give assets to their children in order to qualify for Medicaid coverage of LTC expenses.

On the positive side, the bill may increase the number of states that can offer a Partnership plan, which provides a more seamless approach to pay for LTC expenses. The Partnership program, sponsored by the Robert Wood Johnson Foundation, is a unique venture that links private long-term care insurance and Medicaid (Medi-Cal in California). Federal law currently limits it to California, New York, Indiana and Connecticut. In those four states, individuals who buy a Partnership long-term care insurance policy are entitled to keep more of their assets if they eventually have to go on to Medicaid after depleting their insurance. Without Partnership protection, an individual who goes on Medicaid in a Partnership states has to spend down to $4,000 or less in savings, and a couple has to spend down to $6,000 or less. For example, in New York, if you buy a policy with three years of nursing-home coverage and six years of home-health care,  you become eligible for Medicaid after exhausting your benefits---but without spending any more of your assets. Such policies protect assets, but you may not exceed Medicaid income limits. If you move out of state, you can keep the plan but lose the asset protection. 

The Partnership approach is a real incentive for insureds to purchase the minimum requirements that help protect their assets if they are confined to an LTC facility for an extended period of time. The bill’s changes create a perfect opportunity for agents to discuss the new look-back rules, which makes it more difficult for seniors to shield assets before becoming eligible for Medicaid. The Partnership plan’s expansion into more states will also encourage sales of LTC policies. Gauge how your agency can take advantage of the changing environment to increase its LTC sales.

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

I N   T H E   S T A T E S
Wooley Resignation Signals Party Change in Louisiana

The resignation of Louisiana Insurance Commissioner Robert Wooley will mean a party change in the state’s top insurance job, but observers expect few major changes in the way the commissioner’s office operates.

Wooley, a Democrat, announced a week ago that he will resign, effective Feb. 15, to pursue private-sector job opportunities. Succeeding him is Deputy Commissioner Jim Donelon, a Republican and former state legislator who became deputy commissioner in 2001.

Wooley took office in October 2000 after his predecessor, Jim Brown, was convicted on a federal charge of lying to federal agents during an investigation into the liquidation of an insurance company. Wooley was elected to a full four-year term in his own right in 2003.

According to Louisiana law, a new election must be held if there is more than a year remaining of the unfilled term. As such, Donelon will face an election on Sept. 30, possibly against State Sen. James Cain, a Democrat who chairs the Senate Insurance Committee.

"While Commissioner Wooley will appropriately be remembered for his leadership and service to his fellow citizens in the wake of Hurricane Katrina, no one should forget his successful efforts to modernize the Pelican State's regulatory system and to make that state a more competitive marketplace," says Wes Bissett, Big "I" senior vice president for government affairs and state relations. "He will be missed by consumers and insurance agents in Louisiana and across the country, and the Big ‘I’ wishes him well in his future endeavors."

Louisiana Big "I" CEO Jeff Albright praises Wooley for his work as commissioner and for balancing consumer concerns with maintaining a business-friendly environment for insurance companies. Albright says he expects similar work from Donelon.

"Our hope is that whoever the next insurance commissioner is will not try to make radical changes in the way the Insurance Department is moving," Albright says.

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

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C A R R I E R   N E W S
Safeco Names LaRocco President, COO

Safeco CEO Paula Rosput Reynolds announced Feb. 2 the appointment of Michael LaRocco as president and chief operating officer of Safeco Insurance Companies.

According to a press release, LaRocco will bring together the company's property-casualty operations and will have profit-and-loss responsibility for all Safeco product lines, including product development, underwriting, claims, service, sales, distribution and market research.

"Mike led Safeco's transformation to automated underwriting, and he has a deep understanding of the business," Reynolds says. "Moreover, Mike wants to win in the marketplace, and I believe he has the insights and drive necessary to deliver results in the years ahead."

LaRocco has been with Safeco since 2001. Prior to that, the 27-year insurance veteran started his career at Progressive and held executive positions at GEICO.

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F O R M S   &   S U B S T A N C E
Risk Management 101: ATV Exposure Risk

The expression "There’s more than one way to skin a cat," in a manner of speaking, also describes the risk management process. Insurance isn’t your only tool when helping your insureds manage risk.

The Virtual University recently received the following question:

"A property owner who owns a 70-acre farm was asked to allow friends with ATVs to access the property for off-road riding. This owner is concerned about the liability associated with this permission should he consent. Is there any recommended disclaimer or hold-harmless form that this individual can use to protect himself against possible future damages or lawsuits should an accident occur?"

The VU faculty’s consensus was that providing "recommended disclaimer or hold harmless" wording would come pretty close to practicing law without a license. VU faculty members either had not seen any such wording or strongly recommended that it not be the agent who supplied it. Essentially, the agent needs to explain that this is a serious legal exposure that a qualified attorney must address.

The agent should discourage the insured from using his property for this purpose. If the insured insists, make him very aware that the situation could ("probably" might be a better word) come back to haunt him.

Again, all you can do is provide the coverage (with some really big limits) and suggest that he work this out with a good attorney. Even if he gets an ironclad hold-harmless agreement with the ATV owners, it wouldn’t protect from unknown riders or third-parties claims by other injured by the ATVs on your premises.

This scenario is a great exercise of Risk Management 101. If your insured insists on allowing this activity to take place on his property, you need to make sure that proper coverage and high limits are in place. Is he willing to pay for this to maintain these friendships? Perhaps showing his friends how much the increased insurance premiums will cost can be his excuse for not allowing it. And, if they offer to reimburse him, let him know that, with such remuneration, he might then have a business exposure not covered by his policy.

In this case, the old risk management technique of avoidance is probably most appropriate. It’s doubtful that the other RM techniques such as loss control, insurance and risk transfer, are feasible or affordable.

If you have any doubts, read the comments of VU faculty member and risk management consultant Jim Mahurin:

"I have dealt with situations involving ATVs and property owners for almost 20 years. Almost all of them were bad. Really bad.

"One project was to perform a risk assessment for a private community following a catastrophic ATV mishap. They owned several thousand mountainous acres surrounding a lake and housing area. ATV use had been very popular in the community. The tragedy was quite an education for everyone, the seriousness of the situation accentuated somewhat by the payment of several hundred thousand dollars above what was covered by insurance.

"ATV operation is dangerous. A sizeable number of mostly young people are killed on these machines every year. A far larger number suffer catastrophic injury. The injury profile arising from ATV use includes a high incidence of debilitating intracranial and cervical trauma. If the riders wears helmets, the injury patterns are more upper and lower cervical, with a reduced incidence of intracranial trauma. The secondary traumatic pattern tends toward legs and pelvis areas. A not uncommon problem is brain embolism. Both primary and secondary traumatic injury patterns frequently result in permanent disability or death.

"ATV operators are usually young, and the costs associated with fatalities often pale in comparison to the expense of caring for a permanently and totally disabled youth. As you pose the question about reducing or transferring liability, let me suggest you assume the situation from which you have to defend yourself is a quadriplegic or catastrophic brain injured youth facing 50 years of nursing home confinement. This is more common than you think and juries are quite sympathetic.

"With regard to insurance, make sure the ATV operators have coverage and provide evidence of it. Few of them will and a homeowners policy usually won't get it."

To read the entire article, including more risk management commentary and links to ATV accident statistics, click here.

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A G E N C Y   M A N A G E M E N T
Nip Problem Employees in the Bud

Every agency has one. The employee who comes in 15 minutes late everyday, takes an hour and a half lunch and jets out of the office at 5 p.m. on the dot. Or the employee who sits in the back of agency meetings with a smirk on his face, rolling his eyes when he thinks no one is looking. Or the employee whose productivity has taken a sharp downturn, but has no intentions to make up for it. What’s an agency owner to do?

According to the National Federation of Independent Business (NFIB), it’s much tougher for small business owners to tackle the issue of problematic employees. Large companies tend to have a complex checks-and-balances mechanism in place that has an answer for every kind of employee issue. Smaller business, however, often lack the resources to know how to effectively address problematic employees.

In a recent report, NFIB Legal Foundation Senior Attorney Elizabeth Gaudio offers three recommends small business owners to when encountering problem employees:

1. Explain the obvious. From the start, employees must understand what behavior is expected of them. Outlining what is acceptable and what is unacceptable behavior provides business owners with the framework to evaluate an employee’s performance and provide discipline if necessary. Businesses should also document a discipline policy and code of conduct, and each employee should receive a copy. Most importantly, business owners and managers need to follow these policies.

2. Evaluate employees regularly. Written documentation of specific employee misbehavior (like absence or tardiness) is the best defense against discrimination claims. It’s important to be honest. Often managers who aren’t comfortable with criticism give employees higher marks than they deserve. Resist the temptation to hide bad news. It’s also helpful to include employees in the process—use the evaluation as an opportunity to set goals and specific deadlines together.

3. Pursue early intervention and be proactive. Addressing poor performance is uncomfortable for you and your employee. But by addressing things early on, the business will benefit in the long run with improved employee performance, increased morale and protection against potentially costly litigation. In almost every circumstance, termination shouldn’t be a surprise. It should be a culmination of progressive discipline that has given the employee the clear signal that he/she has not been performing up to your expectations.

Doing nothing is never the best course of action, according to the NFIB. Keeping quiet when facing an employee issue may not rock the boat, but it also does not improve the situation.

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

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