|
T H U R S D A Y, F E B R U A R Y 1 7 , 2 0 0 5
Insurance in the Blogosphere | Spitzer Secures Three More Guilty Pleas, AIG Hit with Two Subpoenas | Weighing in on 2005’s Market Trends | Debate Over Social Security Reform Creates Opportunities for Agents | If At First You Don’t Succeed... | The Retention Myth | Big "I" National News |
 V I E W : P & C T R E N D S
Insurance in the Blogosphere
The potential for liability for statements made on Web logs
Have you ever paid much attention to Web logs (or “blogs,” as they are referred to for short)? If you are like me, you get more than you can read a day without going out to look for more random musings. As insurance professionals, however, if you have not yet visited a blog, it’s probably time you do. They are growing in prominence as sources of up-to-the-minute information. With so much opinion written down, it just feels like there is a growing liability out there.
If you want a quick primer on blogs, I recommend http://weblogs.about.com/. There is a helpful glossary and general information on finding blogs, creating and using them and even how to write in one.
I recently visited Eliot Spitzer’s campaign blog. The mainstream media picked up on his announced candidacy for governor of New York after he posted it on his Spitzer 2006 Web site blog.
Howard Dean’s presidential candidacy used blogs, and much of his early success was due to the blog’s ability to connect with followers. If you are interested in seeing some early blog history, visit the Howard Dean blog site and go back to 2003 when hard dollar campaign funds were rolling in.
As things have evolved, there are now blogs for every event and subject. In the insurance field, there are blogs by actuaries (for example, www.actuary.net), blogs by wholesalers (http://blog.euclidmanagers.com), blogs from London brokers (www.elbornes.com/iNews) and, of course, blogs on the law (www.pointoflaw.com). However, I haven’t come across a blog by an insurance agent.
This brings us to the final point, which is neither new nor settled: liability for statements made on Web logs. Just this week, the Washington Post article “Free Expression Can Be Costly” spotlighted erstwhile employees of various organizations who became unemployed, possibly because of their musings on their blogs. (To view the article, go to www.washingtonpost.com, register for free and search the archives.)
There is the potential for liability for statements made on blogs. Whether it is the media organization that hosts the site where comments are posted or the person who makes the comment, there is always the potential for liability for what one says or publishes.
Will blogs bring employment practices claims? Will there be an up-tick in liable claims in homeowners, general liability and more specific media and publishers’ liability policies? It remains to be seen, but perhaps that is why my search engine yields no agent-sponsored blogs.
Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. | T O P |
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
Spitzer Secures Three More Guilty Pleas,
AIG Hit with Two Subpoenas
Three executives pled guilty this week to criminal charges in New York Attorney General Eliot Spitzer’s investigation of fraud and bid-rigging in the insurance industry. Additionally, AIG found itself in the middle of a further investigation, receiving additional subpoenas from both the U.S. Securities and Exchange Commission and from the New York Attorney General’s Office.
Joshua Bewlay, a former managing director at Marsh; John Mohs, vice president of an AIG unit; and Carlos Coello, an AIG underwriter, pled guilty Tuesday to criminal charges. All three admitted to a scheme that enabled Marsh to protect incumbent carriers at policy renewal time.
According to the Associated Press, “Bewlay told the court the practice of obtaining losing quotes—known as ‘B quotes’—to steer business was widespread in the industry and in the company, not just the efforts of a few employees.”
He also said that it was “Marsh protocol … to prevent Marsh’s clients from obtaining accurate information” about how the broker was compensated, by requiring “multiple layers if inquiry to discourage the client from obtaining an answer.” According to the New York Times, the complaint filed against Bewlay alleges that Marsh employees were directed to tell clients that the company received 1% or 2% of the cost of placed insurance as a bonus from carriers; however, according to the complaint, it received 10% to 15% in Bewlay’s unit.
All three are expected to testify in future cases, as are the six individuals who previously entered guilty pleas, the New York Attorney General’s office said in a statement. Spitzer, appearing Wednesday on Fox News’ “Your World with Neil Cavuto,” said, “they are cooperating so we can build bigger cases against others more senior in the industry.”
And there’s more to come. “We are at the early stages of the investigation. We will follow the facts wherever they lead,” Spitzer’s spokesman, Daren Dopp, told USA Today.
The facts appear to be centering serious attention on AIG. The insurance carrier received two subpoenas Monday, one from Spitzer and one from the SEC, dealing with “nontraditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions,” AIG said in a statement. These types of nontraditional insurance products blend insurance with financing, which some think facilitate the improper shifting of losses off the buyer’s balance sheet, helping the bottom line in the short term but misleading regulators and shareholders. Another high-profile carrier, Berkshire Hathaway, also has been subpoenaed about these types of products.
“[I]t is an area we have been looking at for a fair bit of time now, and there are a number of subpoenas out there investigating or inquiring about the use of nontraditional products that have occasionally, but not always, been used to smooth over earnings in a way that violates the law and accounting principles,” Spitzer said on “Your World.” “Whether or not that is the case here, of course, only time will tell.”
According to The Wall Street Journal, “the new subpoenas are the first to indicate that regulators may be interested in whether insurers have aided their own results with the techniques that they pioneered and marketed over the past 20 years as insurance moves beyond its core business….”
Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. | T O P |
P & C L & H T R E N D S
Weighing in on 2005’s Market Trends
Now that we’re firmly entrenched in the year 2005, analysts and industry groups are releasing their market forecasts. Read on for a breakdown of the most recent predictions:
LOMA surveyed its board of directors to ascertain 2005’s business outlook. The resulting “2005 Industry Forecast” says that 2005 will be ripe with challenges.
Regulatory and legislative issues will create many of those challenges, with recent investigations into the industry having “a profound impact” on compensation, disclosure and product marketing in the future. The life insurance industry also can expect challenges surrounding retirement savings and Social Security reforms.
On the plus side, “sales, premiums and profits are poised to continue 2004’s modest growth, with universal life and variable annuities looking particularly robust,” the forecast finds. “In addition, the general consensus is that the ongoing pressure on companies to reduce expenses and realize economies of scale will keep merger activity moving forward.”
A.M. Best Co. recently released a special p-c report containing 2005 trends. It predicts industry changes in the wake of 2004’s sequence of hurricanes. Companies will need to take into account “the occurrence of multiple independent events simultaneously—despite their lack of correlation—” and identify “how much the organization can afford to lose in total, and develop contingency plans for restoring capital and proceeding with business after an event occurs.”
P-C trends to expect this year: Rate adequacy and underwriting controls must be maintained to drive responsible competition; flexible infrastructure will be necessary to stand by commitment to walk away from underpriced business; Long-standing business practices, such as broker compensation, will change and transparency will increase; catastrophic planning will remain at the forefront; and economic indicators necessitate underwriting discipline to drive earnings in the near term.
A.M. Best Co. also released a special report on life-health insurance, which it termed “an industry at a crossroads.” Although it says the industry is “stable” due to “improved earnings and strengthened balance sheet on both an absolute and risk-adjusted basis,” it faces challenges.
Among the trends: Scale will play an increasing role in many market segments, as the cost of doing business in the life industry continues to spiral upward; earnings will play an increasing role in many market segments as the cost of doing business in the life industry continues to spiral upward; earnings will be more volatile, while capitalization (long term) will diminish gradually; and regulatory scrutiny will increase as examinations of compensation and distribution dynamics within the insurance industry continue.
Standard & Poor’s Equity Research’s “Industry Survey on Insurance: Property-Casualty” singles out a softening of prices for premiums and heightened regulatory risk as 2005’s challenges to the industry. The study finds that many insurers’ long-term casualty lines’ loss reserves are “light” and fourth quarter 2004 results may be inadequate as companies take on “large, one-time increases, particularly for asbestos litigation.”
The Business Journal predicts a tough year ahead. A Jan. 31 article says the insurance industry “expects fewer mergers this year and a regulatory effort to create greater transparency about the terms of insurance contracts following the wake of major scandals in New York.” Workers’ compensation’s “skyrocketing costs” will be the biggest issue for health insurers, the article says.
Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. | T O P |
L & H T R E N D S
Debate Over Social Security Reform Creates Opportunities for Agents
There has been a barrage of information on President Bush’s proposed private savings account as a way to rescue Social Security and provide Americans with an opportunity to become part of the “ownership” society. A portion of Social Security payroll taxes would be deposited on behalf of each person in an individual account instead of a totally unfunded promise to receive future payments.
Under the new proposal, future Social Security benefit payments for younger Americans would not be as high as in the current system. However, the goal is that the growth of the private savings accounts would offset lower benefits payments if the money was wisely invested.
Why is Social Security reform necessary? An aging population and the realization that there will be fewer workers to proportionally support the benefit payments to retirees are two reasons. Left unchanged, the consensus is that in a matter of years, the Social Security system could not be maintained in its current form. Benefits would have to be reduced (i.e. the age that recipients could receive full payments) and/or payroll taxes would have to significantly increase, placing an undue burden on future workers.
Monthly retirement benefits are only one component of the Social Security System, which is formally known as Old Age, Survivors, Disability and Health Insurance (OASDHI). One of the other components, Medicare, is heading for financing problems much more quickly. Last year’s addition of limited prescription drug benefits is expected to cost more than originally forecast. And, given the large increases in medical inflation, the rate of growth in health care costs will yield large increases in the amount retirees have to contribute. This will no doubt present tough choices for politicians in balancing the needs and costs of such an enormous benefit.
How do these developments affect independent agents? Regardless of the final design of these government programs, individuals will have to be more self-reliant for their future retirement needs. The public debate surrounding these issues raises awareness with the general public. Have you had a discussion with your clients about their retirement planning?
While the public cannot control the final outcome, there are steps that each person can take. Tell your clients to contribute to a Roth IRA or regular IRA to fund their future retirement needs. Don’t forgot that the amount that can be contributed to an IRA increases to $4,000 for 2005 (an extra $500 can be contributed if someone is age 50 or older). And, with the new Health Savings Accounts (HSAs), people have an opportunity to pre-fund their future retiree medical insurance needs in a tax-efficient basis. While the political debate continues, don’t let your clients miss an opportunity to begin taking control over their future.
Dave Evans ( dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine. | T O P |
O N T H E H I L L
If At First You Don’t Succeed...
Perseverance Moves Class Action, More Work Needed
For Future Legal Reforms
Perseverance paid off last week with the enactment of the Class Action Fairness Act (S.5) in the U.S. Senate. After a last-minute setback in the Senate in 2004, in which a deal between the Republican majority and a number of Democratic senators came apart and forced the withdrawal of the legislation, Majority Leader Bill Frist (R-Tenn.) brought it back to the floor to start the 109th Congress. Sen. Frist quickly shepherded S.5, sponsored by Sen. Charles Grassley (R-Iowa), through the Senate, and the House is expected today to pass the legislation as well, which will send it to the President’s desk. The corresponding House legislation was sponsored by Rep. Bob Goodlatte (R-Va.).
The movement on class-action reform is a huge victory for the Big “I” and for all independent insurance agents and brokers. The legislation will move major class-action lawsuits to federal courts, which are better equipped to handle these issues and, also very importantly, not susceptible to “venue shopping,” in which attorneys steer cases to state courts with reputations for being trial-lawyer friendly. The intent is that fewer frivolous lawsuits will clog the system, which is a win-win for businesses and consumers alike. Businesses and those who insure them will face less exposure, and consumers with legitimate complaints will have the opportunity to see their cases move forward more rapidly.
The unflinching effort on class action will need to be replicated to enact even more legal reforms. It appears the next battle will come over proposed reforms to the asbestos litigation system. In January, Senate Judiciary Committee Chairman Arlen Specter (R-Pa.) opened hearings on the Fairness in Asbestos Injury Resolution (FAIR) Act.
Although the Big “I” is very pleased that Chairman Specter is moving forward on this important topic, the association and its industry partners are very concerned about two issues. First, the legislation as proposed contains no aggregate payment levels, which makes it impossible to determine the cost of the proposed trust fund that would be used to compensate victims and take asbestos cases out of the court system. Second, there is definite concern over insurers contributing as much as $46 billion to the proposed trust fund when the legislation under consideration could leave the door open for a return of some cases to the court system.
“It is very important that the funding proposal be fair and explicitly stated so that insurers do not risk being on the hook for more money than was envisioned all along,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs. “It is also fundamentally worrisome to ask insurers to pay massive sums into a trust fund that may not provide a final resolution to the problem.”
The Big “I” will work with lawmakers to clear up concerns and revamp the asbestos claims system, which reportedly has already forced more than 70 companies into bankruptcy. It also will keep pushing medical-malpractice reform, which appears on hold for now.
Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.
| T O P |
P & C T R E N D S
The Retention Myth
In The Odyssey, Homer tells the story of the three sirens leading sailors astray. Insurance agencies have their own insidious sirens leading them astray, and one of the most treacherous is retention rates. Much has been written about retention rates, and much of it is as of mythical proportions as Homer’s writings.
Of the hundreds of insurance agents I have polled about their competitive advantage, 90% to 95% respond 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 customers must like us or 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 high/low retention and good/bad customer service.
I recently heard an experienced buyer of insurance agencies speak about why his company chose certain agencies over others to purchase. He reported he initially used retention rates to judge good agencies from poor ones. With time and many acquisitions, he learned that good agencies and poor agencies alike had similar retention rates. Regardless of agency quality, retention rates typically fell within the very narrow range of 87% to 92%.
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 from other agencies? 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 that we can 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 price.
Thinking we have great service, and therefore a competitive advantage when we don’t, leads to disaster because we forego creating real competitive advantages. We take it for granted they like us, and then we are surprised when they leave. We never specifically asked how we were doing. We don’t know if they stayed because they did not have a better offer or because we truly were the better agent.
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 90%+ 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 VU research library: 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. For more information, click here.
Bill Wilson ( bill.wilson@iiaba.net) is the Big “I” director of Virtual University. | T O P |
|
