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 Big “I” National News

On the Hill
House AIG Hearing with CEO Liddy Creates Shockwaves
OFC and insurance regulation discussed.

Yesterday, the House Financial Services Capital Markets Subcommittee held a hearing titled, “American International Group’s Impact on the Global Economy: Before, During and After Federal Intervention.” The main focus of the hearing was the testimony of Edward Liddy, chairman and CEO of American International Group (AIG), but before Liddy’s testimony, the subcommittee heard from a separate panel that included a state and federal regulator, making this part of the hearing more directly relevant to Big “I” members.

The witnesses on the first panel included: Scott Polakoff, acting director, Office of Thrift Supervision; the Honorable Joel Ario, insurance commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners; Orice Williams, director, Financial Markets and Community Investment, Government Accountability Office; and Rodney Clark, managing director, insurance ratings, Standard & Poor’s.

Most congressional members focused on the bonus issue in their opening statements, but Rep. Ed Royce (R-Calif.) used the occasion to pitch his “optional” federal charter bill (OFC) as providing a “world-class” regulator and argued that it would close many perceived gaps in regulation. In his testimony, Ario said AIG’s insurance companies remain strong, “in part because state regulation continues to wall them off from the high risk activities engaged in by AIG Financial Products.”

Financial Services Ranking Member Spencer Bachus (R-Ala.) posed a question specifically on optional federal charter, stating that, “Some have called for an OFC, but as I’ve seen it, I haven’t seen much failure in the state regulation of the insurance industry.” Ario responded that he agreed – that AIG’s insurance subsidiaries are a success story and that liquidity issues of the larger company caused the problems. Rep. Carolyn Maloney (D-N.Y.) asked about AIG’s insurance subsidiaries and how they were segregated from the rest of the company. Ario said that state insurance regulation ensured that the insurance company assets are walled-off from creditors and the overall holding company. Rep. Maloney also asked if AIG’s Financial Products division was allowed to fail, whether AIG’s insurance portion would be protected. Ario responded that yes, the assets would be there and it would be protected. 

Predictably, much of the questioning of Liddy centered on the issue of bonuses being paid to employees of AIG’s Financial Products division. Mr. Liddy mentioned that retention of employees was necessary, because there was still $1.6 trillion of “stuff” in AIG’s Financial Products division portfolio and there’s a concern that if that remainder (down from $2.7 trillion initially) was not handled appropriately, the company could implode resulting in a devastating effect on the rest of the economy. Rep. John Campbell (R-Calif.) questioned Liddy on AIG’s insurance operations and Liddy did say that although AIG’s property-casualty businesses have experienced investment losses like much of the industry, they are healthy. He also said that AIG’s life insurance companies are doing well, but they can’t sell them because there are no available buyers. 

The House Financial Services Committee will continue to look into AIG next week with a full committee hearing scheduled for Tuesday with Treasury Secretary Geithner and Fed Chairman Ben Bernanke expected to testify.

Tom Koonce (tom.koonce@iiaba.net) is Big “I” vice president of government affairs.

 



On the Hill
Big “I” Speaks Up for Small Businesses and Independent Agencies at Hearing
P-C market stable, targeted modernization is the prudent approach to reform.

This week, Spencer Houldin, chairman of the Big “I” government affairs committee, represented the Big “I” before the U.S. Senate Banking Committee in a hearing titled, “Perspectives on Modernizing Insurance Regulation.” 

Houldin is also an independent agent, president of Ericson Insurance in Washington Depot, Conn. and the Connecticut representative on the IIABA board of directors.

The Big “I” was the only agent/broker association to testify at the hearing. Other witnesses included: Michael McRaith, director, Illinois Department of Financial and Professional Regulation, on behalf of the National Association of Insurance Commissioners (NAIC); the Honorable Frank Keating, president and chief executive officer, The American Council of Life Insurers; William Berkley, chairman and chief executive officer, W. R. Berkley Corporation, on behalf of the American Insurance Association (AIA); John Hill, president and chief operating officer, Magna Carta Companies, on behalf of the National Association of Mutual Insurance Companies (NAMIC); Frank Nutter, president, The Reinsurance Association of America; and Robert Hunter, director of insurance, The Consumer Federation of America (CFA).  

In his testimony, Houldin focused on small businesses, like his, in the independent agency system. He said that “(w)e must carefully examine the causes of the current crisis, and determine how or if regulatory policy should change to ensure we do not repeat the mistakes of the past. It is a daunting task, and as a small businessman who must conduct business in the regulatory environment of the future, I implore policymakers to act judiciously and make sure that when you act, you get it right.”

Houldin emphasized that the current state regulation system is working, although it could use some targeted reforms.

“(A)s we undertake a review of current regulations in place and consider strengthening existing laws or adding additional ones, we must ensure that we do not simply toss out regulatory systems that work in an effort essentially to wipe the slate clean and start over,” said Houldin.  “…It should not be overlooked that the state system has an inherent consumer-protection advantage in that there are multiple regulators overseeing an entity and its products, allowing others to notice and rectify potential regulatory mistakes or gaps. Providing one regulator with all of these responsibilities, consolidating regulatory risk and essentially going against the very nature of insurance of spreading risk, could lead to more substantial problems where errors of that one regulator lead to extensive problems throughout the entire market.”   

The Big “I” has long asserted that the best method for addressing regulatory deficiencies is by enacting targeted legislation or federal legislative ‘tools’ that establish greater interstate consistency and streamline redundant oversight, not an optional federal charter (OFC), which would result in regulatory arbitrage by allowing companies to pick and choose a regulatory system. The use of targeted and limited federal legislation on an as-needed basis can improve rather than dismantle the current state-based system and in the process produce a more efficient and effective regulatory framework.

In conclusion, Houldin emphasized that “IIABA believes that, with the exception of a properly crafted systemic risk overseer at the federal level, targeted modernization is the prudent course of action for reform of insurance regulation. Therefore, any efforts to use this crisis and the failure of AIG as an opportunity to promote misguided measures that would allow a regulated insurance entity to choose its own regulator should be summarily dismissed as unacceptable in today’s financial environment.”

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.





L&H Trends
Advising a New Generation of Retirees
Study reveals baby boomers are increasingly receptive to financial planning.

Independent agents offering long-term financial planning strategies are marketing to an increasingly receptive baby boomer generation, according to a recent study by the Partnership for Retirement Education and Planning (PREP). The study also revealed that independent agents who offer long-term financial planning strategies and consider themselves experts in the field are more successful in their businesses than those who do not.

According to Matt Thornhill, founder and president of The Boomer Project, the consulting firm that completed the PREP research, the current economy and an aging baby boomer generation present a window of opportunity for financial professionals.

“This study told us there’s an opportunity to increase success with boomers by talking to them about financial planning,” says Thornhill. “Boomers are more receptive than ever to the fact that they need a plan, mostly because of the economy but also because they’re getting to the age where they’ve realized they need to do something to secure their futures.”

Farah Petion, agency principal at Kemp Insurance Agency in Goshen, N.Y., believes the economy has forced shell-shocked boomers to get back to basics. She adopts a holistic approach with each client, including her agency’s partners from the Hartford and the Wealth Advisory Board in every discussion in order to provide advice from several angles.

“The first thing we do is have an interview with a new client to find out specifically what their needs are, what they want to accomplish and where they are in their finances and budget,” says Petion. “It gives them a place to start and helps them understand they need to look at everything to get a better picture.”

Jim Brown also chooses not to approach advising alone. Brown, executive vice president of Kiely Hines & Associates Insurance Agency in Louisville, Ky., relies on outside help from CPAs, meeting with them and the mutual client to devise the best possible financial plan. According to Thornhill, this team approach is a highly effective way to advise boomers and has been adopted by many of the most successful agencies in the PREP study.

“Planning experts typically involve others in doing financial planning for boomers,” he says. “They may get accountant or a lawyer involved and put together a team. It really helps build trust and credibility.”

According to PREP, self-proclaimed planning “experts” who take a broad, long-term approach to boomer clients’ financial planning had three times the assets under management and reported 40% higher annual revenue than “non-experts” primarily focused on individual product sales. Remarkably, the study’s respondents were split roughly in half between those who consider themselves financial planning experts and those who do not, with no major differences between the two groups other than the focus and success of their businesses.

The study’s 600 respondents were comprised of members of the Million Dollar Roundtable, an association of financial services professionals including independent insurance agents. While 78% of those surveyed said their boomer clients have neglected financial planning because they don’t understand the value, 73% said the economic downturn has made their boomer clients more focused on financial planning. Thornhill believes one of the study’s most important findings is that boomers seeking financial advice should be approached with a holistic plan rather than just a “retirement plan.”

“Retirement has changed,” says Thornhill. “It used to be a life event and it was largely paid for by someone else, but now it’s a life stage that can start at any time, can last from 25 to 30 years and is mostly self-funded through work or a 401(k). The most successful financial planners don’t even use the ‘r-word’ anymore.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.

L&H Trends
Before or After-Tax?
Help your clients make the best choice for their retirement funds.

One of the vexing questions Americans saving for retirement have to consider is whether it’s better to save before-tax or after-tax dollars.

The answer to this question usually depends on a number of factors the saver needs to review, and one of the most difficult variables deals with income taxation. The question actually contains two parts: 1) will the saver be in a higher, lower or the same tax bracket in retirement and 2) what will the tax rates actually be?
 
The traditional notion is that a worker will be in a higher tax bracket while working and then in retirement, when their income decreases, so will their income tax rate. But, if income tax rates increase, depending on the person's income at the time of retirement, their tax bracket and resulting taxes could be higher than when they were working. It does not appear that income taxes will rise in 2009, but they will go up for families who earn more than $250,000 with the expiration of the Bush tax cuts beginning next year. Also, for people investing in the stock market, the current maximum capital gains rate of 15% will also increase to 20% (or possibly more) in 2011. In fact, if someone is saving on a before-tax basis through a 401(k) plan or IRA or if they are investing in the stock market and believe the recent market decline will result in attractive long-term returns, they will presumably be better off investing through a ROTH IRA or holding the stocks or mutual funds on an after-tax basis than having them taxed at the long-term capital gains rate when they retire. However, if an individual is currently in a high tax bracket and expects to be in a lower tax bracket at retirement, he or she will be better off purchasing the stocks on a before-tax basis through their 401(k) plan or their IRA while they are working. 
 
Most mutual fund company Web sites have retirement planning software that will allow the user to plug different tax scenarios and timeframes. But before a taxpayer focuses solely on income taxes, there is another, more difficult consideration: estate taxes. While most Americans will not have to be concerned with estate taxes, the reality is that higher net worth individuals or those with significant life insurance that is not structured through an irrevocable life insurance trust (ILIT) will have to consult with their accountants or attorneys to consider whether estate taxes will factor in the equation. The reason is that if someone has accumulated a before-tax retirement account such as a 401(k) plan or IRA, they could get with a double whammy: income taxes on their withdrawals while they are alive and income taxes for non-spouse beneficiaries who receive funds after the account holder’s death. In addition, the decedent's estate could owe significant estate taxes on the amount being transferred. For some high net worth individuals, the use of permanent life insurance can be a more efficient way to accumulate assets that can be passed income tax and estate tax-free to the beneficiaries.
 
Most Americans will not have to be concerned about estate taxes. However, the decision to save before taxes or after taxes will depend on a number of considerations, and the discussion is made more difficult by the uncertainly of the estate tax exemption and the estate tax rate that may be in effect when they die. Independent agents are advised to have a conversation with their customers to alert them to these issues as they attempt to rebuild their retirement assets.

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

Agency Management
Keep the Right Customers
Know the kind of customer that will benefit your agency.

According to a survey by the Insurance Information Institute (III), satisfied customers would need to save about 20% on their personal auto premium before they would switch, while 15% said they would not switch regardless of the savings. This survey highlights the types of customers independent agencies should be aware of.

Every agency has three types of customers. First are those who will leave due to price. Then there are those on the fence who are not true price shoppers, but do not have strong ties to the agency either. Finally there are those willing to pay more just to maintain a relationship. If an agency treats this third group of customers well, they will stay with your agency regardless of the cost.

Everyone has a limited amount of time and energy. Do you want to spend the time you do have on customers who will stay or leave? It seems many agents want to spend their precious time on those who will leave, but consider, for example, late pays. Late payment problems are inevitably related to the same clients, month after month, year after year.

These clients cost the agency money because agency employees have to spend too much time rewriting, reinstating, collecting and following-up on their policies. The agency derives no benefit from writing these accounts. Yet, many agencies insist they do not want to lose these costly accounts.

On the other hand, by concentrating on profitable accounts, an agency can significantly increase its profits. For example, the average agency has a profit margin of 7%. If an agency could increase its percentage of satisfied customers by 25%, and assuming the percentage of satisfied customers was already 50% of the book, the agency could ostensibly have prices 10% higher than the market on 75% of its book with no extra cost. On a book of $100,000 commissions, that equals $7,500 or a doubling of profits.

With so many new entities such as the Internet, banks and accountants, and more intense competition from direct writers and captives, agencies are going to lose customers. This is not necessarily a bad thing. With options that suit these customers' needs better, they will leave agents. For agents, the key is to accept this fact and make sure your agency does not get stuck with unprofitable customers.

Rise and meet the challenge of the competition. Let them have the low margin customers and make sure you do whatever is necessary to keep the high margin customers, the customers who will pay extra for the professional advice provided by an agency representing multiple companies and working for the customer.

To read the online article, click here. 

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Chris Burand (chris@burand-associates.com) is the president and owner of Burand & Associates, LLC.