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Big “I” National News

On the Hill
Credit Scoring Bill Introduced on Capitol Hill
Proposal has key supporters and potentially significant ramifications for insurers.

In recent years, state legislative chambers and committee rooms across the country have served as arenas for countless debates concerning the insurance industry’s use of credit scores and credit-related information to underwrite and rate insurance policies. The industry and other proponents of the practice have been exceedingly successful in defeating efforts to ban or severely restrict to use of such information, but the latest action in the ongoing credit scoring debate promises to shift the discussion to the halls of Congress and produce some sleepless nights for personal lines insurers. 

Late last week, as Congress was preparing to adjourn for its annual spring recess, Rep. Luis Gutierrez (D-Ill.) introduced the Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008 (H.R. 5633). The legislation creates the possibility that insurers would be banned from utilizing credit scores and credit information to underwrite and set rates for auto and homeowners insurance policies. Specifically, such a prohibition would take effect if the Federal Trade Commission (FTC) concluded that the use of credit reports resulted in racial or ethnic discrimination or served as a proxy for race or ethnicity. 

Rep. Gutierrez has previously expressed concern with the insurance industry’s use of credit reports and data, so the introduction of this proposal was not a complete shock for Hill watchers. However, two prominent members of the House – Financial Services Committee Chairman Barney Frank (D-Mass.) and Mel Watt (D-N.C.), chairman of the Financial Services Subcommittee on Oversight and Investigations – joined Gutierrez as original cosponsors of this legislation. The support offered by Frank and Watt has many insurance company officials concerned about the prospects for the bill. 

H.R. 5633 comes on the heels of an FTC report released last summer, which asserted credit scores could be an effective indicator of risk. This report, “Credit-based Insurance Scores: Impact on Consumers of Automobile Insurance,” was discussed at a House Financial Services hearing in early October 2007 as legislators debated whether credit-based insurance scores are fair. At this hearing, many members criticized the methodology used in the FTC’s report. In a press release announcing the introduction of this bill, Gutierrez and Watt cited the report’s finding that “credit-based insurance scores are a ‘proxy’ or substitute for race or ethnicity in three out of four auto insurance lines: collision, comprehensive and bodily injury.” Because the new bill states that the FTC’s determination of a proxy effect could come from “any study for which a report is submitted to Congress,” there is concern that this 2007 FTC report could be used to show such an effect for auto insurance.

The Big “I” recognizes that credit information is a powerful underwriting tool for insurance companies, but believes such information must be used in reasonable, balanced and consumer-friendly ways. As such, it has and will continue to encourage the insurer community to proactively adopt and implement appropriate business practices regarding the use of credit histories. The introduction of H.R. 5633 shows that this issue remains an important concern of the leadership of the House Financial Services Committee.

Thomas Koonce (tom.koonce@iiaba.net) is IIABA assistant vice president of federal government affairs.




P&C Trends
Independent Agents Hold Their Own
Market share remains steady despite softening conditions, increased direct channel advertising.

Independent agents and brokers continued to hold their market share despite a softening market and a considerable direct channel marketing effort, according to the latest market share report conducted by the Independent Insurance Agents & Brokers of America.

Continuing at a soft-market pace, the property-casualty insurance market grew only about 2.5% in 2006, on the heels of less than 2% growth in 2005. The industry overall booked $488.2 billion in direct written premium in 2006, up from $476.5 and $464.6 billion in 2005 and 2004, respectively, according to data provided by A.M. Best Company. The share of p-c premiums against the overall economy actually shrank slightly in 2006, driven by softening prices in personal and commercial lines, reduced exposure by carriers in catastrophe-prone markets and what was the start of a general economic slowdown (e.g., declining home starts and new vehicle sales).

This is the 12th year the Big “I” has contracted with A.M. Best Company to supply it with year-end industry market share and company expense data. The Big “I” analyzes this data annually to asses the state of the independent agency system.

Independent agents and brokers are responsible for generating $6 of every $10 in the industry’s overall p-c premium revenue. They produced $289.3 billion of the total $488.2 billion market in 2006, compared with $284.1 in 2005 and $276.11 billion in 2004. Their market share held steady at 59.3% of the overall market, consistent with 2005. 

The overall commercial lines p-c market grew about 3% in 2006, to $261.5 billion in direct written premium, up from $253.3 billion the prior year. Between 2004 and 2006, independent agents and brokers were down about a half-point in market share in commercial lines. But they still command more than 80% of all premiums in that space.

The competitive personal lines market experienced slowing premium growth in 2006. Industry wide, direct written premiums were up by about 1.6% to $226.8 billion (vs. increases of 2.2% in 2005 and 5.0% in 2004). With a market share of 35.3% in personal lines, independent agents and brokers dropped about a half-point in market share during 2006. In recent prior periods, they had been increasing by a quarter-percent or so in each year. Clearly, the infusion of marketing money from the direct channel was a factor in the change and this advertising will continue to be a challenge for independent agents in personal lines.

The independent agency system undoubtedly controls commercial lines and holds a significant share of personal lines—and, in some states, dominates both lines. The varied share among the states, however, demonstrates the potential for many independent agents and brokers to continue to grow in commercial and personal lines markets.

Katie Butler (katie.butler@iiaba.net) is editor in chief of IA.

Big “I” members can obtain a copy of the full report on the Big "I" Virtual University. If you don't know your User ID or Password, e-mail your name, agency name and address to logon@iiaba.net. For non-IIABA members, subscriptions to the Big "I" Virtual University are available.




Legal Advocacy
Scruggs Pleads Guilty in Bribery Case
Trial lawyer could face jail time, fines and loss of license.

On March 14, Richard “Dickie” Scruggs, the high-profile trial attorney known by some as the “tort king” for waging battle against the insurance industry, pleaded guilty in U.S District Court in Oxford, Miss. to conspiring to bribe a judge. Scruggs handled a number of cases that gained national attention, including representing his brother-in-law, former Senate Majority Leader Trent Lott, in his claims against State Farm following Hurricane Katrina’s destruction of Lott’s home.  

Scruggs’ plea stems out of allegations against him in a case in which his law firm sought $26.5 million in attorneys’ fees from an $80 million settlement in a Hurricane Katrina lawsuit involving State Farm.

Scruggs, his son, David Zachary Scruggs, another member of Scruggs’ firm, Sidney Backstrom, and two others also were allegedly involved in a bribe of $50,000 offered to Circuit Judge Henry Lackey for a ruling favorable to Scruggs on the division of the attorneys’ fees. Lackey reported the matter to federal investigators who worked undercover to gather evidence against the group. The two others involved, Timothy Balducci, an attorney, and former state auditor Steve Patterson, admitted to their roles in the bribe and chose to work with federal investigators. According to the indictment, Balducci was the one who approached Lackey and subsequently dropped off the bribe payment to Lackey’s chambers. However, once Lackey reported the incident to authorities, Balducci agreed to work with the FBI and wore a wire while at Scruggs’ law firm.

Initially Scruggs’ attorney tried to have the indictment dismissed and the wire taps prohibited from the case, citing that Balducci acted alone. The judge considering the case against Scruggs rejected that request.

Scruggs is expected to lose his law license as a result of the guilty plea and could face five years in prison and $250,000 in fines. He could also face further charges for ties to a similar case with former attorney Joey Langston. Langston has pleaded guilty to bribery charges for attempting to bribe Circuit Court Judge Bobby DeLaughter for a favorable ruling in an unrelated case.

It is uncertain if Scruggs’ plea last week will open the door to additional allegations of misconduct in connection with other cases handled by Scruggs, and many in the insurance and legal communities are watching to see how that unfolds. 

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




P&C Trends
Examining the Economic Environment
A look at the ever-changing stock market and its effect on independent agents.

If you thought you were having a rough week, imagine being a long-term employee at Bear Sterns and coping with the fact that your employer was just bailed out by J.P. Morgan --- at $2 per share. A year ago the share price was $160, so it wasn’t just investors who got burned by the stock’s plunge. At least 30% of all Bear Sterns stock was held by employees, so if an employee had accumulated 10,000 shares over their working career, instead of the $1.6 million they had a year ago, they will now receive $20,000.  On top of that, a significant number of Bear Sterns’ 14,000 employees may be out of a job due to the consolidation with J P Morgan. That results in double trouble. 

Whether or not the economy is officially in a recession --- which is defined as two consecutive quarters of negative growth in the gross domestic product in the country --- by now most consumers believe that is the case, according to the most recent poll taken by CNN. The poll indicates 74% of the people surveyed believed the country is in a recession. A quick, and perhaps over simplistic, history of the recent problems started with the meltdown in subprime mortgages (due to very relaxed and sloppy underwriting requirements), which spread to financial institutions and other investments that owned chunks of the securities backed by subprime mortgages. As the economy started to slow, higher prices for basic commodities --- particularly energy --- driven by global demand and a weakened dollar, started taking a toll on businesses that were being squeezed by increased production costs and tepid consumer demand. The weakened dollar was acerbated by the Federal Reserve’ desire to help financial institutions and subprime mortgage holders by lowering the overnight federal funds rate, which has put pressure on the value of the U.S. dollar.

Since two-thirds to three quarters of economic activity is driven by consumer spending, the slowing economy has resulted in lower stock market prices and lower housing prices which have only increased consumers’ negative outlook. President Bush’s stimulus package was designed to provide instant liquidity and funds to most Americans so as to increase consumer spending and generate economic activity. However, given the sharp increase in energy and food prices, a good portion of the stimulus may go to pay for those basic household expenditures and not toward capital goods. Independent insurance agents are not immune to these economic conditions either, as they have been dealing with a soft market for insurance. Both 2006 and 2007 provided good returns for most insurance companies and, as a result, there has been price competition; but on the whole, there is still strong demand for experienced insurance professionals. Agency principals should remind their employees that while financial results can be cyclical, most independent insurance agencies have not laid off employees.

In fact, independent insurance agents may be able to find displaced professionals from other industries who may want to change careers and seek employment opportunities which offer better control of their employment destiny. Certainly working in an independent insurance agency provides a good professional avenue for good communications skills, technology and a solid work ethic to build a rewarding career. If your agency is looking to grow, be sure to explain the advantages of working in this industry and you may find an enthusiastic audience.

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




Agency Management
The “Born Salesman” Myth
Being a good sales person isn’t a hereditary trait, it’s a honed skill.

Probably no myth is more pervasive than the idea that there are “born” sales people. Granted there are some people who seem to naturally have the attributes we associate with “good selling.” However, most of the vision of what constitutes selling is manufactured by media portrayals of sales people, not what they really are.

Face it. Most people give little respect to professional sales people. Want to clear a room? Tell people you are an insurance sales person or a financial planner and watch them run for the door like cockroaches when a light goes on. Why? Because of the myths about selling.

Probably no myth is more pervasive than the idea that there are “born” sales people.. This one goes along with the idea that one is born with “the gift of gab.” Granted, there are some people who seem to naturally have the attributes we associate with “good selling.” In the Doubleday dictionary, one of the slang definitions of selling is “to deceive; cheat.” That seems to be the definition writers and dramatists have seized to portray sales people. The loudmouth in a plaid coat fast-talking someone out of their money --- Meredith Wilson’s “Music Man,” Prof. Harold Hill, conning the whole town into buying his band instruments --- that’s selling in the popular literature.

On the other hand, there is also the sad Willy Loman in Arthur Miller’s Pulitzer Prize-winning play, “Death of a Salesman,” who makes selling a sad and tragic waste of a life. Or, worse yet, “Glen-Gary Glenn Ross” --- the stage play/movie that shows selling as a mean spirited, con job carried on by desperate losers in dingy offices managed by sociopath maniacs.

Either way, the popular view of selling is poor.

If Herbert Hoover was right and the business of America is “business,” then selling is the key function driving business. It is an accountant’s lie that “nothing happens until somebody sells something.” Any true professional in sales will say that a great deal must happen before anyone sells anything. Selling is the revenue-generating arm of business, but sales people still treated like the “born salesperson.”

There are a number of ways people get into professional selling. First there is the “fast buck” chaser who sees a sales person buying a client lunch or playing golf, driving a new car, dressing well and says, “That’s for me!” Yahoo, another sales person is born!

Or there is the “luck truck driver.” A sales person quits and the boss looks around and says “Let’s make Charley a salesman --- everyone likes him when he makes his deliveries.” Obviously he is a “born sales person.” And another sales person is “born.”

Believing sales people are born justifies the Darwinian school of developing sales people. Why else would you put someone in sales and then not continuously train or nurture them? Why? Because they are born, not made. After all, they are only the revenue-raising arm of the business!

Selling is a set of skills that can be learned by anyone who really wants to be in sales. In fact, many of the traits that most people associate with selling are not particularly desirable in a sales person. The “good fellow well met” may be looking for acceptance or a social outlet and not a profession. The brash center-of-attention may be looking to satisfy psychological needs that will go against them in selling. The extravert who everyone says, “you should be in sales” is usually looking for attention for themselves, not a profession in selling.

That high-energy dynamo who is out to change the world is every sales manager’s dream. The “born” sales person who can “sell ice cubes to Eskimos” is the fantasy of every sales manager’s escapist dream. And while there may be people who come out of the womb genetically programmed to be “born sales people,” they are few and far between.

It would be better to have a group of B+ players, dedicated to the profession of selling, than a group of ego-driven prima-donnas. The B+ players will have better long-term performance because of their dedication and hard work than flash-in-the-pan superstars.

To read this and other sales articles online, click here.

Bob Ayrer (perform@improvingsales.com) is a professional speaker and consultant on building top performing sales programs.