T H U R S D A Y ,  F E B R U A R Y   2 8 ,  2 0 0 8 

Big “I” National News

P&C Trends

Population Correlation
As the coastal population rises, so do hurricane losses.

According to the National Oceanic & Atmospheric Administration (NOAA), larger economic damage from hurricanes is a result of an increase in population, infrastructure and wealth on U.S. coastlines --- not a spike in storm frequency or intensity.

“We found that although some decades were quieter and less damaging in the U.S. and others had more land-falling hurricanes and more damage, the economic costs of land-falling hurricanes have steadily increased over time,” says Chris Landsea, one of the researchers at NOAA’s National Hurricane Center in Miami. “There is nothing in the U.S. hurricane damage record that indicates global warming has caused a significant increase in destruction along our coast.”

NOAA researchers determined that economic hurricane damage has been doubling every 10 to 15 years and it warns that if costal populations continue to grow, future storm losses will be exponentially higher.

NOAA’s prediction isn’t surprising to Roger Bond, a life-long resident of Fort Lauderdale, Fla. and president of Cypress Insurance Group. He says the landscape of the entire area has drastically changed over the years.

“I agree with it totally. I have lived here all my life and I have seen this area just explode --- it’s grown so much,” he says. “When I was a boy we had hurricanes...but they didn’t do as much damage, there wasn’t as much to tear up. Now we’ve got a lot more construction and buildings to be damaged. We have a whole shoreline that wasn’t there before.”

NOAA looked at the damage caused by several major hurricanes throughout history, taking into account the swelling coastal population, changes in housing units, wealth per capita and inflation to gauge the effect coastal growth has on hurricane losses. One storm included in the research is the 1926 Miami Hurricane. According to NOAA, if the storm were to hit today, the losses would be an estimated $140 to $157 billion --- dwarfing the $81 billion incurred when Hurricane Katrina hit the Gulf Coast in 2005. Furthermore, if NOAA’s predicted trend of losses doubling every 10 years is true, a storm like the one in Miami could result in an estimated $500 billion in damages as soon as the 2020’s.

“The numbers have gone up astronomically and there are two reasons --- the increase in population and increase in exposure, but also the value of the dollar,” Bond says. “The replacement cost of construction and other damage that is being done is substantially more than it was 10 or 15 or 30 years ago. Now there is one mitigating thing and that is construction codes have improved substantially since our hurricane in 1992, which did a huge amount of damage. There’ve been a lot of changes in hurricane codes, so since Andrew, we’ve had a lot of things written into construction codes that will help.”

With potential damages from storms currently estimated at $10 billion annually, one of NOAA’s main recommendations to lessen future losses is to improve construction standards in coastal areas.

“There is considerable evidence that strong building codes can significantly reduce losses; for example, data presented to the Florida Legislature during a debate over building codes in 2001 indicated that strong could reduce losses by over 40%,” NOAA’s study says. “As strong codes have only been implemented in recent years (and in some cases vary significantly on a county-by-county basis), their effect on overall losses is unlikely to be large, but in future years efforts to improve building practices and encourage retrofit of existing structures could have a large impact on losses.”

Walter Corish, owner of Corish & Company, Inc. has spent his entire life in the Savannah, Ga. area and agrees with NOAA’s findings. However, he and his customers, despite being on the coast, haven’t sustained many losses --- instead his problem is one many in the industry face. 

 “The real issue for us down here is availability and affordability,” he says. “We have not had a major storm in this county since 1979 and that was a category 1 that knocked down trees and took out power --- yet our customers pay dearly for being a tier-one county.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.

VIEW: P&C Trends

Head of the Class
Getting to know college risk management programs.

Recently, Insurance News & Views received an e-mail from the American Risk & Insurance Association (ARIA) listing all the risk management and insurance programs at colleges and universities. Surprisingly, there are 46 such programs in 25 states in the United States, the vast majority of which are part of major business schools.

To view the list, click here. But it’s even more interesting to note the correlation between independent agent involvement and the financial and educational strength of the program.



Insurance education is reasonably well spread out through the universities and colleges in the United States. There is a concentration in some states, such as Texas and Pennsylvania, which lead the pack with five risk management/insurance programs each. Of course, the list is probably not perfect and ARIA is seeking feedback. This is an excellent site for anyone with a college-bound child or relative who is considering a career in insurance, risk management or actuarial science.

Click on the link to Appalachian State University and you’ll find a program intimately involved with the North Carolina association, The Independent Insurance Agents of North Carolina Association (IIANC). The school’s Richard S. Brantley Risk & Insurance Center is named after the former Executive Vice President of IIANC. The association honored Brantley after 36 years of service to the association with an endowment in his name to create the center. According to Robert Bird, the current EVP in North Carolina, “the association has been very close to Appalachian State, but we are also very close to other programs in the state.”

“In addition to the Brantley Center at ‘App State’ there is an endowed scholarship program there and IIANC has endowed scholarships at all 16 UNC system universities,” Bird says.

The largest endowment is at Appalachian State, but significant endowments also exist at the University of North Carolina at Charlotte and just recently the IIANC board voted to start a new insurance program is at East Carolina University.

“Every year the association seeks to be close to students of insurance and we provide funding to attend IIANC events,” Bird says. “Students attend our convention and other events on scholarship and in April eight students and two professors will be attending the Big “I” Legislative Conference in Washington D.C.”

How does IIANC manage to such a deep and rich relationship with their University community? According to Bird, “IIANC has been extremely fortunate in that the state of North Carolina purchases much of their commercial insurance via the services of IIANC’s in-house agency.” It is a bit unusual, but about 50 years ago the Department of Insurance asked for the association’s help with the state insurance program. The thought was with IIANC as the agent, the state’s insurance program would be consolidated and better managed. The IIANC board agreed to the arrangement and wrote in their bylaws that profits from the agency would go to promote North Carolina education, highway safety, fire safety or public safety.

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

Producer Compensation Issue Update

Successive Guilty Verdicts in High-Profile Fraud Cases
Top executives from Gen Re, AIG and Marsh & McLennan all face fines, jail time.

On Feb. 25, a federal jury found four former Gen Re executives and one former AIG executive guilty of all 16 counts in the indictment against them for fraud and conspiracy relating to transactions in 2000 and 2001 that prosecutors charged created false presentations of the value of AIG stock. Specifically, the executives were accused of entering into insurance deals that fraudulently increased AIG’s loss reserves by $500 million, making the largest insurer in the world appear stronger financially. 

The Gen Re defendants included Ronald Ferguson, former Gen Re CEO; Elizabeth Monrad. Former Gen Re CFO; Robert Graham, former Gen Re senior vice president and assistant general counsel; and Christopher Garand, former Gen Re senior vice president and head/chief underwriter of finite reinsurance operations in the U.S. The AIG defendant, Christian Milton, is a former vice president of reinsurance for the company. 

The trial included testimony from industry heavyweights Warren Buffett, chairman of Berkshire Hathaway, which owns Gen Re, and former AIG Chairman, Maurice“Hank” Greenberg. Neither Buffett nor Greenberg were indicted, and both denied having engaged in any wrongdoing. Nonetheless, in 2006, AIG agreed to pay more than $1.6 billion in restitution and penalties as part of a series of legal settlements with federal and state regulators that stemmed from investigations of fraud, bid rigging and improper accounting. 

According to the Department of Justice, the government presented evidence that the defendants knowingly participated in a scheme to falsely inflate AIG’s reported loss reserves by using sham reinsurance transactions to create a phony paper trail and make it appear that Gen Re solicited reinsurance from AIG when the goal was really to manipulate AIG’s financial statements.   

Ferguson, Monrad, Graham and Milton each face a maximum prison term of 230 years and a fine of up to $46 million, and Garand faces a maximum prison term of 150 years and a fine of up to $29.5 million. The sentencing date for all defendants is May 15.

Commenting on the verdict, Acting Deputy Attorney General Craig Morford, chairman of the President’s Corporate Fraud Task Force remarked, “These convictions continue the string of successes in our crackdown on corporate fraud and our effort to restore integrity to our financial markets.”

This followed the Feb. 22 convictions of William Gilman and Edward McNeeney, both former executives with Marsh & McLennan, in New York state court for violations of the state’s antitrust law. In summary, a lawsuit against Marsh, filed by then New York Attorney General Eliot Spitzer, accused Marsh of: soliciting and obtaining fictitious and inflated quotes for insurance to deceive clients into believing that there had been true competition among insurance carriers for the clients’ business; and steering business to carriers paying favorable commission. Marsh agreed to an $850 million settlement of the lawsuit in 2005. The investigation into the activities of Marsh also led to an indictment of Gilman and McNeeney. Sentencing for Gilman and McNeeney is set for April 30, and could include up to four years in prison and a fine of up to $100,000.

There are other lawsuits at various stages, and there’s no way to predict what their outcome will be. However, prosecutors remain committed taking these cases as far as possible. According to Paul Pelletier, one of three federal prosecutors who tried the case against the former Gen Re/AIG employees, “We’re not done. The investigation continues…We’ve got a lot of work to do to work up the ladder.”

One lesson to take away from all this is that, in the wake of a series of accounting scandals that resulted in the demise of companies that were respected household names, the fraud of a few led to much undesired publicity for an industry dedicated to protecting business and personal consumers. It appears that prosecutors believe there is more to come. So while the reputation of the industry was sullied by the serious misconduct of a few, it appears it may take the good work of many to repair the damage.   

For more information, contact IIABA’s General Counsel Debra Perkins at 800-221-7917; debra.perkins@iiaba.net.

Legal Advocacy

Supreme Court Ruling Impacts Retirement Plans—and Agents
Individual 401(k) participants can sue for breach of fiduciary duty.

On Feb. 20, the U.S. Supreme Court ruled unanimously that under ERISA (the Employee Retirement Income Security Act of 1974), an individual participant in a 401(k) defined contribution retirement plan can sue to recover damages from the plan administrator for breach of fiduciary duty. This means an individual can sue for losses in his/her account alleged to be caused by the plan administrator’s failure to carry out investment directives from the individual participant.

The plaintiff in this case, James LaRue, alleged that his former employer and the plan administrator of his 401(k) defined contribution retirement plan, DeWolff, Boberg & Associates, failed to implement the changes he requested in his account investments. He sought recovery of $150,000, the amount by which he claimed his account would have appreciated if his instructions had been followed. 

The outcome of this decision could impact independent insurance agents in at least three ways:

1. When they offer D&O and other related commercial insurance coverage to customers, agents now have another reason to discuss the exposure based on the organization’s retirement plan and the  types of insurance available to cover that exposure.

2. Agents who are involved with retirement plans --- who provide “bundled” service arrangements with insurance companies or mutual fund companies --- should understand the scope of their potential liability based on their role and take appropriate measures to protect themselves from that exposure.

3. As trustees and/or plan sponsors for their agency’s retirement plan(s), agents should make sure they are discharging their duties as plan sponsors in an appropriate and timely manner as required by law. 

In ruling for LaRue, the Supreme Court recognized a right of recovery for individual participants in defined contribution plans from breaches of fiduciary duty by the fund administrators. The basis for the decision stemmed from violations specified in ERISA relating to fiduciaries “proper management, administration and investment of fund assets” so that “the benefits authorized by the plan” are paid to its participants. The decision distinguished the recovery right of an individual in a defined contribution plan, which is allowed, from the recovery right in a defined benefit plan which is only available for a plan as a whole, not for individual participants in a plan.   

The case will now go back to the appropriate lower court for it to determine the damages payable to LaRue, if any, consistent with the Supreme Court’s decision and based on the facts.

Retirement plan trustees know they have a responsibility to oversee the operation of the plans they manage, and typically do so by delegating certain functions like investments, recordkeeping, drafting plan documents and filing required forms with the Internal Revenue Service and the Department of Labor. This decision will focus trustees on the need to ensure that they monitor the delivery of services by service providers who can be deemed to be “fiduciaries” under ERISA. Because of the potential exposure to liability of plan trustees, many plan sponsors provide directors and officers (D&O) insurance coverage to plan trustees --- sometimes as a rider to the organization’s D&O policy.

As the amount of assets grow in 401(k) plans, it is not unusual for long-time plan participants to have $500,000 or more in their accounts. Since many plans provide for periodic transfers among investments --- in some cases as often as daily --- the financial exposure increases if there is an operational error, such as a failure to implement the investment directive of a plan participant. Accordingly, there is an increased need to ensure that plan administration is carried out in accordance with the plan’s provisions.

It is likely that there will be more related litigation to further refine the circumstances when individuals can pursue damages for losses they incur from alleged breaches of fiduciary duty by plan administrators. Thus, agents should monitor future legal developments to gauge the impact on their business activities and on their customers’ retirement plans.

The Supreme Court’s decision is available in its entirety in the members-only Legal Advocacy section of www.independentagent.com under Cases, ERISA. 

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

Agency Management

Perfecting Customer Relationships
Learn to better understand customers’ wants and needs.

Relationships by their very nature are always changing. They are fluid, flowing and organic. They don’t remain the same very long. Good relationships involve give and take, assessment and re-assessment, the ability to step back and look at how you’re doing and then, to correct our course when needed.

How often do you take the pulse on your customer relationships? Could you be using the time to really understand your customers’ needs and what they value? How might you find innovative ways to get involved in a dialog with your customers? Relationships, after all thrive on trust, respect and good two-way communication.

Long-term customer relationships evolve as the customers come to know they can trust us to have their needs at heart and respond accordingly. But with their needs changing often, how do you keep up? Here are a few suggestions:

* Pick up the phone and call customers.

* Set up a conference call with a group of similar customers. Invite 10 customers from a similar customer segment and ask them to be “experts” and tell you their most pressing needs.

* Do an Internet-based survey. Send an email to customers who have given you permission to use their names for your promotional purposes and ask a few of the questions you want answers to. You might offer an incentive to reply or a prize to be awarded randomly among those who participate.

* Send a postcard or email after a transaction. I know an HMO call center that routinely sends 75 postcards a day to people that have called. The postcard asks the client to rate them on a number of different factors.

* Send a postcard just to say “Hi.” It’s less expensive than a letter, prettier than an email. I still use them on a regular basis to make one additional “touch” in the process of relationship building.

* Create customer dialogs. Set up a formal dialog program and let customers know they are part of it. Bring members of your team --- customer service, finance, etc. --- to meet members of their team. Have a set agenda and practice being non-defensive before going or hire an outside facilitator to ask the questions and keep up the conversation. The objective is to find out what constitutes value for the customer and find out how well you are delivering it.

This time of year is a great time to plan how to enrich and deepen the relationships you have with customers. And know that if you use this time to gain wisdom, and use that wisdom to make your customers' lives better, the rewards will come back to you.

To read the entire article, click here.

JoAnna Brandi (joanna@customercarecoach.com) is publisher of the Customer Care Coach^®, a weekly training program on customer care and president of JoAnne Brandi & Company.