T H U R S D A Y,    F E B R U A R Y   2 4 ,   2 0 0 5 

  Industry Insiders 'Saw it Coming'   |    Producers, Consultants or Distributors?   |   Dealing with 2004's Hurricanes in 2005   |    Maryland Dictates Med-Mal Commissions: Driving Docs Direct   |    Take a Page from Radio's Playbook on Demographic Segmentation   |    TRIA, Class Action Developments Provide Boosts for Big "I"  |     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
Industry Insiders ‘Saw it Coming’

Was the insurance industry cruising for a bruising at the hands of state investigators? According to a recent survey of insurance and reinsurance execs, many respondents say they were aware of bid rigging and “saw it coming.” Also making headlines this week is Aon Corp.—for both reportedly exploring selling its wholesale brokerage business and for chatter about it closing in on a settlement with three state attorneys general. 

Q.Know Technologies, Inc., in conjunction with Reactions/US Insurer magazine, released the results of its recent information transparency survey of more than 270 insurance and reinsurance executives. According to the survey, of the 70% of respondents who said they were aware of alleged bid rigging activities, 21% “saw it coming.”  

“The root of the problem for many was the lack of transparency into electronic communication, mainly e-mail, which belied inappropriate practices in some cases,” the survey reports. How concerned were respondents about electronic documentation? A whopping 47% said they were either “somewhat” or “not at all” confident “their organization had access and visibility to all electronic documentation necessary to meet full compliance.”

How will the industry handle the investigations’ repercussions? An overwhelming majority of respondents—82%—believe all fee and contingency arrangements should be disclosed in the future. The 68% that revealed they are changing their companies’ best practices cited employee training and new technologies as “top priorities currently either being considered or deployed to protect their company in this environment,” the survey says.

Aon, the world’s second largest insurance broker, is rumored to be close to reaching a settlement agreement with the Connecticut, Illinois and New York attorneys general, which would end their current investigations into improper conduct by Aon.

According to The New York Times, Aon and the attorneys general have been negotiating for weeks, and a settlement could be reached as soon as this week.

“There have been some very difficult but promising discussions,” Connecticut Attorney General Richard Blumenthal told The NY Times.

The Chicago Tribune reported Wednesday that the settlement reached by Marsh & McLennan with New York Attorney General Eliot Spitzer in January may serve as a model for the settlement talks with Aon.

Marsh’s settlement had an $850 million price tag, which was the same amount it collected in contingent commissions from insurers in 2003. Using that formula as a template, Aon’s settlement could cost the company as much as $170 million, which is the amount it received in contingent commissions in 2003, according to the Tribune article.

Although Aon has not been charged with wrongdoing, it has already set aside $50 million for a potential settlement of state investigations, says the Tribune.

In other Aon news, the company announced Feb. 16 that it is “exploring alternatives relating to its ownership of Swett & Crawford,” its wholesale brokerage business. The revelation comes on the heels of Willis Group Holdings’ announcement the day before that it will sell Stewart Smith Group, its wholesale division, to American Wholesale Insurance Group, Inc.

“With the general turmoil in [the] industry, a lot of companies are looking at their business models to see if there are conflicts of interest and trying to do something to address them,” Chicago-based Morningstar analyst Justin Fuller told the Tribune.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. | T O P |

P & C   T R E N D S
Producers, Consultants or Distributors?
Conning study examines prospects for agents and brokers in the wake of Spitzer scandal

What will the long-range implications be for broker business practices as a result of the Spitzer investigations? It seems that every segment of the industry is weighing in, and Conning Research & Consulting tackles the question in its latest study, “Prospects for Agents and Brokers: Producers, Consultants, or Distributors?” The study gives an overview of the investigations spawned from the Spitzer suit against Marsh and discusses the implications for the industry.

The study concedes the differences between agents and brokers, but says that the industry has blurred the distinction of the two and has “used sales languages to show that the interests of both consumers and insurers were being met.” In examining the challenges to the broker business model, the study hones in on one of the more controversial aspects of broker payment—contingent commissions. According to the study, there are three primary questions which are critical to evaluate the “justification for contingent commissions:”

• Is the broker acting entirely as a service provider on behalf of its client, or as an independent intermediary as part of a distribution system of the insurance industry?

• Is the client in any way disadvantaged, in the form of higher costs or loss of other value, by cost savings to the insurer in the transaction being passed on to the broker?

• Can market forces combined with full transparency provide the necessary controls to assure that the transactions remain competitive?

As part of this examination, the study notes that “questionable market practices have emerged from the result of the misalignment of interests among brokers, clients and insurers.”  Practices currently under scrutiny include market steering, related third-party transactions, reinsurance broking and tying, personal lines and benefits brokers conflicts and other factors in premium calculations.

What will happen as a result of the investigations? Conning predicts that there will be market ramifications and changes to the ways the industry does business. According to the study:

• “Brokers may see the loss or selective elimination of contingent commissions. The largest brokers have already abandoned the use of contingent commissions, as have a number of smaller regional brokers. Commissions in general are likely to become more transparent, as should the specifics of agency and brokerage contracts. However, it is possible that contingent commissions may yet re-emerge as an acceptable—and, for the client, less costly—compensation arrangement under a principle of full disclosure.

• The pricing of services to clients and underwriters will be subject to far greater scrutiny, with brokers abandoning the old “loss leader” approach to many of the risk management and claims management consulting services they have historically provided either free of charge or at uneconomic prices when viewed as standalone transactions.

• There will be greater pressure to shop risks more widely and more frequently in search of best prices and terms. This will likely increase expenses for both brokers and underwriters

• Stronger Chinese walls will be erected between primary and reinsurance broking operations.

• Related-party transactions in general will be subject to much greater scrutiny and may be heavily constrained or prohibited—either through regulation or by industry practice.”

For more information on the study, visit www.conningresearch.com.

Katie Butler (katie.butler@iiaba.net) is IA editor-in-chief. | T O P |

P & C   T R E N D S
Dealing with 2004’s Hurricanes in 2005

When four hurricanes pummeled the Sunshine State in 2004, many Floridians were left with significantly damaged—if not completely destroyed and uninhabitable—homes. How has 2004’s series of hurricanes impacted the industry, and how will Florida’s insurance regulations change to accommodate another hurricane spree?

According to the Insurance Information Institute, last year’s hurricane season accounted for insured losses totaling more than $21 billion. As of January 2004, more than 1.3 million of the record 1.5 million reported claims had been settled, according to the Hurricane Insurance Information Center and the Florida Insurance Council’s statistics.

Citizens Property Insurance Corp., the insurer of last resort, faces an estimated $400 million shortfall as a result of 2004’s hurricanes, which inflicted $1.6 billion in losses on the state-backed insurer. Florida’s policyholders will likely have to pay a one-time assessment to help with the deficit.

The Florida Legislature will meet in March to discuss recommendations that the Joint Select Committee on Hurricane Insurance approved Feb. 17.

“This is the framework for the substantive committee to begin their work...and address the hurricane insurance problem of our state,” Sen. Rudy Garcia, the joint committee’s co-chairman, told Ft. Lauderdale’s Sun-Sentinel.

The legislature will pour over the 20 recommendations that suggest new laws and options for Florida citizens to better cope with another rapid-round of hurricanes.

One of the most controversial recommendations would require insurers to offer deductibles of 1%, 2%, 3%, 7% and 10% of policy limits. Currently, 2% deductibles are required. According to BestWire, “Recognizing that requiring insurers to offer lower deductibles may negatively impact the financial capacity of insurers to write policies, the report recommended the legislature consider tying this requirement to other means for increasing the capacity of

insurers to write policies, such as lowering the CAT fund’s retention.”

“About 76% of Floridians have a 2% deductible, and industry representatives have said that offering a lower deductible could reduce their ability to write insurance in Florida, and would mean higher prices for customers,” the Sun-Sentinel reports.

Among other the recommendations the legislature will weigh next month:

• Lowering the amount (currently $4.5 billion per occurrence) that triggers an insurer’s eligibility to receive funds from the Hurricane Catastrophe Fund.

• Adopting a “loyalty provision,” which bans companies from not renewing policyholders with no claims for five years.

• Lobbying Congress to permit tax-free hurricane savings accounts.

• Requiring companies to inform policyholders of the amount of their hurricane deductible on the policy’s declarations page and the premium renewal notice.

The legislature is expected to turn some of the recommendations into law. Among other legislation that has already become law in the aftermath of 2004’s hurricane season: Effective May 1, the state will move from an occurrence-based deductible to a singe-season hurricane deductible.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. | T O P |

V I E W :   P & C   T R E N D S
Maryland Dictates Med-Mal Commissions: Driving Docs Direct

If there were birds in the coal mines of insurance commissions, a cage full of Baltimore Orioles died on Jan. 10 at a dig in Maryland. While lawmakers are still sorting out implementation issues, a Democrat-dominated legislature overturned the veto of Republican Governor Bob Ehrlich and put into law a medical malpractice reform bill that caps agent commissions at 5%.

According to the Oct. 7, 2004 IN&V’s article “Agent Commissions, Part 3: The Med-Mal Mess,” while 5% is materially below what some insurers have paid on this line, as carriers have left this market, commissions have declined to about this level anyway.

So not enough to kill a cage full of Orioles you say? Ahh, but there is methane mixed with the carbon monoxide. The most troubling part of the medical malpractice insurance billfrom an agent’s perspective is that it dictates that writers of med-mal in Maryland must allow policyholders to avoid commissions altogether and must accept insured/applicant inquiries directly for a fee of 1% of premium. Never mind the insurers may not want to do business that way. It is now the law.

What is next…restaurants? Will patrons in Maryland now be able to go back to the kitchen and serve themselves and save the 15% or 20% waiter tip? How will they manage to keep the wine cellars organized? Can I dump my real estate agent at the last minute and demand a “for sale by owner” deal directly with the seller?

Seriously, consider yourself warned. While the other examples will probably never happen, does anyone want to take bets we won’t see something similar with other lines of insurance as they ebb through cycles of high and low prices?

Our industry is in serious trouble in the court of public opinion. You can search the literally hundreds of articles on both the Democratic and Republican sides of the efficacy of the med mal reform bill in Maryland, and you will not find an article, comment or passage bemoaning the legislative intrusion into the way a business has been legally done for as long as anyone can remember. Where’s the outrage over the elimination of $10,000,000 in compensation to honest tax-paying, insurance agents of Maryland? At an Big “I” Best Practices average of $65,000 average commissions per employee of the agencies that write med-mal, the Maryland Legislature just put more than 150 jobs at risk in Maryland. Apparently, if they are insurance jobs, no one seems too concerned.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. | T O P |

L & H   T R E N D S
Take a Page from Radio’s Playbook on Demographic Segmentation

When you leave the office today, pause a minute to notice your car radio’s preset buttons. What is it that makes you select a handful of stations to program into these buttons? Aside from the talk radio and sports junkies shows, you listen to those stations because you enjoy the music they play, which probably fits into a category like rock, classic rock, pop, classical and country western. Within those categories, certain demographic patterns emerge. For example, classic rock typically attracts a listening audience of 35 to 49-year-old males. (Of course, not everyone falls into the demographic. My 17-year-old son listens to the Allman Brothers, Jimi Hendrix and Led Zeppelin.)

Demographic segmentation allows the radio station manager to focus on programming that appeals to a specific demographic, i.e. males 35 to 49 years old, with an average income of $55,000 for a classic-rock station. This is turn enables the radio sales staff to look for advertisers that want to appeal to that specific demographic for clothes, beer, entertainment, etc. If you are an independent agent selling life-health insurance products, it makes sense to take a page out of the radio industry’s playbook.

Perhaps you’d like to focus on the senior market. First, you need to consider their unique needs and decide how to approach marketing to this group. While many seniors are Web savvy, you wouldn’t want to sink a substantial portion of your budget into creating the best Web site in the business. Rather, investing time and money in community endeavors and promotions may be more effective ways to reach this audience. Seniors put a lot of credence on reputation and references. Having an office in reasonable proximity is also a plus. These types of preferences are good news for independent agents who generally are embedded in their local communities.

Additionally, seniors are very concerned about people who prey on the elderly, so solid references are very important. Splashy marketing materials can’t make up for solid references and long-standing customers. Seniors also take the advice of their attorneys and accountants on important insurance proposals. Again, having networked with these groups and being perceived as knowledgeable and sincere with customers is very important.

If you want to focus on reigning in Gen X-ers as customers, focus on comprehensive Web sites and embrace technology in the delivery of services. The customer might want to check the status of their business with the agent on a 24/7 basis. Expect these customers to send questions about their accounts via e-mail.

While agents like to serve broad constituencies, if you want to really serve a particular market, make sure you understand the demographic wants and needs of the group and you will have a much easier path to success.

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
TRIA, Class Action Developments Provide Boosts for Big “I”

Two major developments involving the Big “I” on Capitol Hill took place last Friday, with the reintroduction in the Senate of legislation concerning terrorism insurance, and the enactment, at long last, of the Class Action Fairness Act.

Senators Chris Dodd (D-Conn.) and Robert Bennett (R-Utah) last Friday introduced legislation to extend the Terrorism Risk Insurance Act (TRIA) through the end of 2007. It is essentially the same bill they introduced last year, but the bill did not make it through Congress before its adjournment.

The Big “I” has been joined by many of its industry partners in strongly supporting TRIA extension. The existing TRIA legislation expires Dec. 31, 2005, but action is needed as soon as possible to avoid gaps in coverage in policies with effective dates of Jan. 2, 2005, or later.

“There is a great concern within the industry that catastrophic losses related to terrorist attacks remain uninsurable, and that if TRIA should be allowed to lapse, it could be difficult, if not impossible, for businesses to obtain insurance against losses related to terrorist acts. This could have serious economic consequences in the event that another terrorist attack takes place on American soil,” says Charles E. Symington Jr., Big “I” senior vice president of federal government affairs.

“We are very pleased that senators Dodd and Bennett have introduced this legislation, which is crucial to the insurance industry’s ability to cover catastrophic losses related to terrorism and also to preserving confidence in the market,” says Brendan Reilly, Big “I” director of federal government affairs. “This legislation is important because, if enacted, it will help provide certainty in the insurance marketplace. Passing this legislation would be a crucial development for many of the business clients of independent agents and brokers.”

In addition to the reintroduction of TRIA, the Big “I” had another victory Friday when President Bush signed the Class Action Fairness Act (S.5) into law just days after the Senate and House passed it by wide margins. Big “I” President Tom Grau and CEO Bob Rusbuldt were present at the signing ceremony, signifying the association’s involvement in pushing for this much-needed legislation.

“Enactment of the Class Action Fairness Act is an important first step in creating needed legal reform in America,” Rusbuldt says. “This bill will strike a balance in class-action cases between the needs of consumers and small businesses, and the Big ‘I’ has been pushing for this solution for years.”

The Big “I” strongly supported necessary reforms to the nation’s class action system, particularly changes that would put an end to so-called “venue shopping,” in which plaintiffs’ lawyers steer cases to particular state courts that are trial-lawyer friendly. Such abuses of the system encourage frivolous lawsuits and create hardships for small businesses, including independent insurance agents and brokers. Senate Majority leader Bill Frist (R-Tenn.) and the bill’s sponsor, Sen. Charles Grassley (R-Iowa), as well as Rep. Bob Goodlatte and Sen. Dodd, were instrumental in getting the bill to the President’s desk.

Cliston Brown (cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.   
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