T H U R S D A Y ,   M A R C H   2 ,   2 0 0 6

Is the Industry Ready for the Next Big One? |  Adequate Industry Reserves Still a Problem |  Federal Court Issues Junk Fax Decision |  Product Evolutions Lead to LTC Innovations |  Protect Your Agency from Insurer Insolvencies | Big "I" National News

P & C   T R E N D S
Is the Industry Ready for the Next Big One?
How demographic trends, frequency affect the industry’s potential losses.

Mardi Gras went on as scheduled this past week in New Orleans. Did it mark the jubilant return of the city’s spirit, or was it a sad reminder of its former glory? Either way, as the spotlight shone on the Big Easy once again, memories of Hurricane Katrina were forefront on people’s minds. Could the country—and the insurance industry—withstand another catastrophic event like Katrina?

A recent GE Insurance Solutions paper says that the insurance industry is prepared for future storms of Katrina’s magnitude, but demographic trends are upping the ante for potential insured losses. "Coastal Warning: The Rising Costs of Hurricane Frequency and Severity," by Kenneth Slack and Larry Spoolstra, also raises questions of what would have happened if 2005’s devastating hurricane season had been coupled with another major insured-loss event.

According to the paper, more horrific hurricanes are more than possible—they’re probable. However, as Hurricane Katrina showed, the industry is prepared.

"While there is a perception that Hurricane Katrina created a loss that was unforeseen, it was well within the expected range of events planned for by the insurance industry," it says. "The industry is capitalized to withstand monster storms and earthquakes with insured price tags in the $60 billion to $120 billion range."

While this is reassuring news, problems could potentially occur if several catastrophic events happen in one year, leaving some companies without reinsurance protection. For example, what if Hurricane Katrina and the Sept. 11 terrorist attack occurred in the same year?

"Would the industry’s capital providers continue to maintain sufficient levels of support going forward if such a heavy catastrophe season (like 2005’s) came on top of an unexpected loss, such as the Sept. 11, 2001 terrorist attack? During that year, natural catastrophe losses fortunately were relatively low, the paper says. With hurricanes’ frequency and severity on the rise, this is a very real possibility.

Another significant issue is the surge in coastal regions’ population, which is increasing at break-neck speed. In 2003, about 53% (153 million people) of America’s population lived in coastal areas. In addition, 23 of the 25 most densely populated U.S. counties were located on the coast, according to the paper.

"Since 1960, there has been a 150% in coastal populations, which will experience another increase of 7 million people by 2008," the paper finds.

So people like living near the water…no big surprise, right? What is shocking is just how much the population boom affects the industry. Citing Dr. Joseph Chamie, the paper says the value of insured property in Florida increased from $565.8 billion in 1988 to $872 billion in 1993. AIR Worldwide places the today’s total value at $2.4 trillion. That amounts to a larger potential losses should another powerful hurricane pound the area.

As a result, "The insurance industry must continuously examine concentrations of exposure and how it evaluates those concentrations, whether it is with the help of models or other underwriting techniques."

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

T O P

P & C   T R E N D S
Adequate Industry Reserves Still a Problem

Better p-c underwriting performance doesn’t translate into better industry reserves. That’s the conclusion of a new report from Standard & Poor’s.

Although property-casualty industry underwriting results have improved in the last few years, the ongoing challenge of attaining ultimately adequate reserves remains. Insurers

and reinsurers appear no closer now than they were a year ago to achieving full reserve adequacy for 1997 through 2001 business, according to the study. What’s worse, the industry has actually lost ground.

During the first nine months of 2005, reserves for accident years 2002 and prior experienced $16 billion of adverse development. This more than offsets the positive development during those quarters for accident years 2003 and 2004. Strong pricing and low losses for those years enabled $10 billion of reserves to be released for accident year 2004, and $3 billion for accident year 2003. The $16 billion of adverse development during the first three quarters of 2005 for accident years 2001 and prior brings the cumulative adverse development of reserves for those accident years to about $60 billion.

Claims from accident years 1997 through 2001, during which the soft market's competitive pressures led to increasingly severe underpricing and lax underwriting, are threatening to affect the market in a severe hit rather than at a gradual pace. The ongoing legacy issues from those years, which include the industry's overstatement of capital by an average of 16% after the World Trade Center disaster, mean that reserves might still undergo more adverse development.

But there was some positive reserve news in 2005. The most recent accident years, 2004 and 2003, showed very favorable reserve development through the year's first nine months. Personal lines pricing and underwriting was strong during that period, which enabled the high reserve releases in 2005 for business from those accident years.

Will the p-c insurance industry ever achieve a sufficient level of reserve adequacy? And even though the soft market of 1997-2001 continues to dominate the reserving environment, has the industry succeeded in adopting a sustained period of prudent underwriting, pricing and reserving discipline over the long term to avoid a recurrence of those years? According to the report, S&P remains skeptical about the adequacy of reserves for accident years 2001 and prior, especially for primary commercial lines insurers.

Katie Butler ( katie.butler@iiaba.net) is IA’s editor-in-chief.

T O P

O N   T H E   H I L L
Federal Court Issues Junk Fax Decision

The Junk Fax Prevention Act of 2005 (JFPA) is a federal law that creates an "established business relationship" (EBR) exemption that allows individuals and businesses to continue to send commercial faxes to people they have EBRs with. As reported in IN&V, Governor Schwarzenegger signed a bill into state law that puts significant, nationwide restrictions on businesses communicating with California customers via fax. The law creates a far more restrictive state statute than the JFPA by requiring businesses to obtain "express permission" before sending fax communications. The new law has no exception for an EBR. Furthermore, the law applies not only to faxes sent within California, but also to interstate faxes, meaning that it regulates commercial faxes sent into and out of California. The California law took effect Jan. 1, 2006, for faxes within California, but two separate court orders delayed it for interstate faxes until Feb. 27, 2006.

The Junk Fax Coalition (JFC), which counts IIABA as a founding member, filed a petition asking the FCC for a declaratory ruling on preemption of state fax statutes. Additionally, IIABA independently filed comments in support of the merits of the petition and requested that the FCC rule in favor of federal preemptive authority over conflicting state statutes governing unsolicited commercial faxes.

Largely due to a lawsuit challenging the new California law and the FCC’s consideration of the petition filed by some members of the JFC, a federal judge handed down an extremely favorable decision on Feb. 27, concluding that the California statute "is constitutionally infirm to the extent that it seeks to govern the interstate transmission of unsolicited facsimile advertisements."

The court accepted the argument that the language of the TCPA clearly demonstrates Congress's intent to preempt inconsistent state laws with interstate effect, and found that the California statute attempts to inhibit Congressional intent. The court announced that its decision "will terminate and afford relief from the uncertainty, insecurity and controversy giving rise to this action."

In its opinion, the court reserved judgment on a request for injunctive relief, saying that it would delay judgment so that the parties can have an opportunity to be heard on the merits of their respective claims. As a result, California currently is not prohibited from enforcing the junk fax law, but it is unlikely that the state would move forward as a result of this decision.

This is a major victory because any action brought under the California statute now will have to deal with a federal court's conclusion that the statute is preempted as applied to interstate faxes. IIABA will continue to provide updates on the status of the injunctive relief portion of the case, but the court’s laudable decision goes a long way in protecting the important role the JFPA plays in providing independent agents with an effective and convenient means for communicating with policyholders.

Patrick O’Brien ( patrick.o’brien@iiaba.net) is Big "I" director of federal government affairs.

T O P

L & H   L E A D S
Product Evolutions Lead to LTC Innovations

An evolution in product innovation going on, and it’s resulting in a convergence of life, annuity and long-term care policies. Traditionally, products are devised with a primary need in mind, such as income replacement (life insurance) or disability income (long-term disability insurance). They often include some riders like a premium waiver in the event of disability or accidental death and dismemberment coverage, which provides ancillary benefits when an accident results in death or injury.

The cost of long-term care is soaring, and recent legislative initiatives signed into law heighten the need for individuals to purchase LTC insurance. In the past, some people with meaningful assets relied on Medicaid and planned to gift assets at least three years prior to needing long-term care assistance. Many took comfort that Medicaid could not capture a majority of their net worth, which was value of their residence. However, recently passed legislation will increase Medicaid’s look-period to recapture asset transfers from three years to five years. And, the maximum ceiling for home equity will decrease to $500,000 from $750,000, which means that homeowners will not qualify for Medicaid if their equity exceeds that amount.

These factors will no doubt lead more people to purchase LTC insurance. Companies are introducing new products that complement LTC insurance by providing additional insurance. For example, New York Life has a new annuity product that provides for a fixed returned interest rate guarantee and, if the policyholder wants long-term care protection, will provide up to 36 months of coverage equal to 1% of the gross annuity amount (after six years) and indexed to increase 3% annually for an additional asset charge of .40% (four-tenths of 1%). This innovation may prove very attractive for seniors looking to protect their assets. However, should they be in need of long-term care assistance longer than 36 months, they would have to pay when the policy limits are reached.

MetLife also introduced an innovative product called "retirement income insurance," which allows folks age 55 or older to invest a lump sum, thereby purchasing income that will start at age 85. For example, if a female age 60 invests $25,000 in the policy, it will provide her with $17,000 a year for life starting at age 85, while a man can guarantee himself $23,300 a year. This new type of coverage is referred to as "longevity insurance." Instead of being concerned with premature death, the intent is to provide additional funds in the event of living beyond typical life expectancy.

Independent agents are well poised to assist their customers with these new innovative products. And, they should expect more products coming down the pipeline this year.

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

T O P

A G E N C Y   M A N A G E M E N T
Protect Your Agency from Insurer Insolvencies

Mission. Integrity. Ideal. Excalibur. Universal. Enterprise. Great Global. American Excel. Champion. These are names of companies that used to insure millions of individuals, families and businesses. Perhaps your agency was affected by these or other insolvencies because you were blindsided when they went belly up. There are proactive steps that you can take today to protect yourself and your clients.

If you've ever taken a time management course or read a book on the subject, you probably learned about focusing your efforts within a priority grid, established by importance and urgency. The experts say that you should focus most of your time on tasks and issues that are "important, but not urgent," i.e. the critical functions that affect survival and success.

The same can be said for the attention you give to monitoring the financial stability of carriers used to place direct and brokered business. With more urgent tasks at hand, it is easy to ignore warning signs. There are ways to protect yourself and your clients from insurer insolvency.

General Jimmy Doolittle once said, "One trouble with Americans is that we’re fixers rather than preventers." There have been numerous articles on the subject of insolvency, but most of them are retrospective and explain what happened and why. This approach does little to fix the problem and even less to prevent its reoccurrence.

Independent agent should utilize a practical methodology to examine the ongoing financial stability of their carriers and take corrective action as warranted. While this approach cannot prevent an insolvency, it can help minimize the likelihood that you and your clients will become an active participant.

You may think it’s unnecessary since your agency has E&O insurance (that hopefully covers insolvencies), your state has a guaranty fund and the Texas Higginbotham court case [Higginbotham & Associates, Inc. v. Greer, 738 S.W.2d 45 (Tex. App. 1987)] said you weren't liable. But would you suggest to your insureds that they rely on only one, limited risk management technique to address their exposures to loss?

Not only that, but the Higginbotham case did not totally absolve agents of all responsibility for carrier insolvencies. In fact, the court stated, "We...conclude that an agent is not liable for an insured's lost claim due to the insurer's insolvency if the insurer is solvent at the time the policy is procured, unless at that time or at a later time when the insured could be protected, the agent knows, or by the exercise of reasonable diligence should know, of facts or circumstances which would put a reasonable agent on notice that the insurance presents unreasonable risk."

In other words, failure to exercise reasonable diligence in ascertaining financial stability may place the agent at risk. As the roman statesman Cicero said, "The safety of the people shall be the highest law."

Financial data on companies is widely available from fee services such as A.M. Best, Standard & Poor's, Moody's Investors Services, Duff & Phelps, Weiss Research, etc. In addition, you can obtain supplementary and/or subjective information from company annual statements and stockholder reports, insurance departments, trade periodicals, other agents and numerous ancillary sources.

Let’s examine the use of information readily available from the A.M. Best company, specifically Best's Insurance Reports (P-C). The methodical approach relies on an insolvency checklist that incorporates financial data from A.M. Best and subjective observations of company behavior by agency personnel. Although numerous checklists exist, most require complex calculations of numerous Best or NAIC ratios and financial indicators. What differentiates this checklist from others is that it requires simple yes/no answers to less than two dozen questions about each of your carriers.

To read the entire article and apply the checklist to an insolvency, click here.

Bill Wilson ( bill.wilson@iiaba.net) is Big "I" director of the Virtual University.

T O P