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Industry Use of Education and Job Status Debated in New Jersey |  Zurich Doles Out Millions in Settlement |  What Zurich’s Settlement Means for Independent Agents and Brokers  |  Congress Extends National Flood Program Borrowing Authority| Bipartisan Bill on Data Security Moves Forward |  Stay Abreast of Tax Laws Changes | Big "I" National News

 V I E W :   I N   T H E   S T A T E S
Industry Use of Education and
Job Status Debated in New Jersey
Underwriting and rating factors
put GEICO in hot seat.

In New Jersey, a state still attempting to overcome a historically dysfunctional and anticompetitive automobile insurance marketplace, a new policy debate has begun over the factors insurers should be able to use in the underwriting and rating process. This latest insurance issue du jour first arose when it was publicized this week that GEICO, a relative new entrant in the New Jersey market, considers a person’s education and job status when underwriting a policy.

The issue is only the latest auto insurance issue to dominate headlines in the state. The New Jersey marketplace was a disaster until its legislature enacted a series of reforms in 2003 that have made the state a much different and far more competitive market. Prominent companies that had left the state years ago, including GEICO and Progressive, returned in the aftermath of this progress.

The debate over GEICO’s underwriting practices emerged when the state’s largest newspaper first wrote about the subject in late February and disclosed information contained in an internal company document. The document noted that consumers with certain professions (typically white collar) and more advanced education have superior loss experience and are better risks for the company. In essence, it made the case that the use of these factors can be justified by actuarial data.

Opponents of the practice are quick to disagree and have argued that education and job status should be eliminated as underwriting and rating factors, much in the way that the use of race, religion and ethnicity are banned throughout the country. Consumer representatives, including Bob Hunter of the Consumer Federation of America, have called the practice discriminatory and a sleight-of-hand trick that allows a company to underwrite based on race and other banned criteria.

GEICO and its defenders responded by pointing out that insurers by nature discriminate—in legal, not unfair, ways—and are constantly looking for mechanisms and ways to accurately assess and price risks. They also note that the newly found competitive nature of the New Jersey market enables consumers to shop with various insurers and different distribution channels. A competitive marketplace, they argue, promotes innovation and options and is ultimately the best protection for consumers.

Officials at the New Jersey Department of Banking and Insurance confirm that the state’s auto market is increasingly competitive and that insurers fight over business to the benefit of consumers. The department, which has acknowledged the right of GEICO and others to consider the two factors, reports that more than three-quarters of the states policyholder’s have received rate reductions or dividends totaling more than $442 million since the implementation of the state’s reforms.

The real debate over this issue may just be starting. Four other companies are using the newly controversial criteria or intend to do so, and legislation to ban the use of the factors has been introduced in the House and Senate. These proposals are expected to be debated in the coming weeks.

Longtime observers of the Garden State’s auto debates fear that new restrictions and government intervention in the marketplace may return the New Jersey auto market to the "bad old days." They know from experience that well-intentioned legislation often has disastrous and unintended results for consumers.

Wesley Bissett (wes.bissett@iiaba.net) is Big "I" senior vice president of government relations and state government affairs.

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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
Zurich Doles Out Millions in Settlement

This week, Zurich American Insurance Company and its subsidiaries announced it has entered into two agreements with certain state attorneys general and insurance commissioners relating to their investigations involving producer compensation and insurance placement practices. One agreement is between Zurich and the principal insurance regulator of each state that adopts it ("regulatory settlement") and the other agreement is with state attorneys general from California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas, Virginia and West Virginia ("AG settlement"), which calls for an order and stipulated injunction ("Order") in state court in the states agreeing to the AG settlement.

The state attorneys general and state insurance regulators began to investigate Zurich and other insurance carriers in 2004 in the wake of New York Attorney General Eliot Spitzer’s investigations. They examined the quotes and placements of new and renewed insurance policies and compensation provided to agents and brokers placing such policies. These investigations led to a number of federal and state court private party lawsuits brought on behalf of insureds. The cases filed in federal courts were consolidated into a multi-district class action lawsuit ("class action") pending in New Jersey.

On Oct. 14, 2005, Zurich and the plaintiffs in the class action agreed to a Memorandum of Understanding to potentially settle the class action, subject to various contingencies. Zurich does not admit liability for any violations in the Settlement Documents. To view the settlement documents, log in to the "Legal Advocacy" section of www.independentagent.com.

As to the regulatory settlement, it should be noted that state insurance regulators played an integral role in developing the regulatory settlement’s business reforms and disclosure obligations. NAIC Broker Activities Task Force Chairman Michael T. McRaith, (director of the Illinois Division of Insurance) stated that the regulatory agreement "prioritizes consumer protection with sensible business reforms." The NAIC press release on the regulatory settlement also notes that, "While the decision of whether to join the settlement is subject to the individual review and analysis of each state regulator, the NAIC Task Force supports the settlement as a sound regulatory framework with unprecedented consumer protection benefits."

Among the terms of the settlement:

1. Implementation of Disclosures

a. Disclosure Statement - Zurich must require agents and brokers it compensates for placing or renewing commercial insurance to provide each commercial insured with a disclosure statement before a commercial policy is bound.

The disclosure statement, written and on the form in the settlement documents, must advise insureds of the compensation the company may pay agent or broker for the placement or renewal of a commercial insurance policy. It must include base compensation, contingent compensation and other compensation including brokerage fees, service fees, incentives, etc.

The disclosure statement will not be required of Zurich captive agents (representatives obligated to submit specified business only to Zurich or to give Zurich a right of first refusal on the placement of commercial policies) if they disclose to insureds that the producer will receive compensation (including base, contingent and any other form of compensation) for the placement of the policy or services rendered. The settlement documents do not specify any requirements for the form of such a disclosure.

b. Web site Disclosure – Zurich must post on its Web site a disclosure covering: the range and average amount of base compensation it paid in the prior calendar year for the types of commercial policies covered by the disclosure statement and the factors determining the base compensation; the range of and average amount of contingent compensation it paid in the prior calendar year for the types of commercial policies covered by the disclosure statement and the factors determining the contingent compensation.

2. Implementation of Business Reforms

Among the business reforms Zurich is required to implement:

a. Compliance Program - Zurich must create a U.S. Compliance Office, which will have responsibility for all compliance and regulatory matters relating to the settlement documents.

b. Prohibited Conduct - Zurich cannot: knowingly provide any false bids, quotes or indications to agents or brokers, or any other quote that is not based on "bona fide business, actuarial or underwriting considerations;" allocate customers or markets, rig bids or quotes or fix or stabilize prices; or compensate any agent or broker to include Zurich on a list of companies to quote or enter into any "pay-to-play" arrangements.

3. Restitution

Under the Settlement Documents, Zurich must pay:

a. $100,000,000 to the settlement class members, plus $51,700,000, to be distributed according to a plan of allocation (which is to be drafted by plaintiffs’ counsel in the

class action, in consultation with regulators);

b. $100,000 to cover the costs of notice to the settlement class members; and

c. $20,000,000 to the state attorneys general that are parties to the settlement documents.

4. Cooperation with Attorneys General and Insurance Regulators

5. Releases for Zurich

Upon execution of the settlement documents, the existing investigations, claims and proceedings relative to quotes and placements of new and renewed insurance policies, compensation provided to agents and brokers placing such policies and the allegations in the class action by participating insurance regulators and state attorneys general as to

Zurich and its current and former officers, directors and employees will be terminated

(except for former officers or employees of Zurich’s business unit known as Marsh &

McLennan Global Broking Unit who are no longer officers or employees of Zurich). No investigations, claims or proceedings will be made or reinstated as to these same matters.

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What Zurich’s Settlement Means for
Independent Agents and Brokers

The settlement documents between Zurich and the state attorneys general, and Zurich and the insurance regulators for the participating states, do not just affect Zurich—they also impact agents and brokers doing business with Zurich. Although an agreement, including a settlement agreement, typically obligates only the involved parties to comply with its terms, this settlement documents creates new disclosure requirements on agents and brokers that are distinct from the requirements of applicable statutes or regulations, if any. A provision calls for Zurich to require agents and brokers placing or renewing covered commercial insurance policies to provide the insured with a disclosure statement before the policy is bound.

Zurich has 180 days from execution of the AG settlement to implement use of the disclosure statement. Zurich advised IIABA that it will require all agents and brokers in all states placing or renewing covered commercial insurance policies with the company to use the disclosure statement, including in the states where the attorney general and/or insurance regulator has not executed the settlement documents.

Agents and brokers doing business with Zurich should have received some communications already from the company regarding changes in its business practices and the settlement documents, and the company indicates it will keep agents and brokers informed as the implementation process moves forward.

IIABA will provide updates on any significant developments regarding this matter. Please see below for the Zurich agent/broker compensation policy:

Zurich Agent/Broker Compensation Policy

Most insurance companies providing commercial coverage in the United States distribute their insurance products through the independent agency and brokerage system. Your agent or broker is an independent businessperson or team of people not employed by Zurich or any other insurance company.

Most agents and brokers choose to be compensated for their services through the insurance companies with whom they place the insurance that they sell to their customers.

Base Commission

Zurich will pay your agent or broker a commission. Zurich establishes its base commission on several factors including the type of insurance policy, the size of the insurance policy, and individual policy underwriting considerations. Each insurance policy has a standard commission, which is the most that Zurich will pay. The standard commission for the types of policies Zurich is quoting is:

Policy 1 ____% Policy 3 ___%

Policy 2 ____% Policy 4 ___%

If you have chosen to compensate your agent or broker directly or you have not consented to your agent or broker taking a commission, you should speak directly to your agent or broker.

Contingent Compensation

[May be deleted if no agreement with broker to pay contingent commissions]

Zurich may also pay contingent compensation to your agent or broker. Zurich does not pay contingent compensation to all of its agents and brokers, and some agents and brokers choose not to accept contingent compensation from insurance companies. Contingent compensation is paid in addition to the base commission. Contingent compensation is not calculated until the end of the year. The amount will be a percentage of premiums based on several factors that determine how profitable your agent’s or broker's insurance is for Zurich including [to be modified if factors changed]:

1. The total premium written for all eligible business in a year

• Zurich pays a percentage of the eligible premiums in addition to the "base commission."

2. Achievement of targeted premium levels

• Zurich sets reasonable targets of premiums that will be placed with Zurich by your agent or broker each year. If that target is reached, then your agent or broker is paid an additional amount on the eligible premiums.

3. The profitability of the business

• For each agent and broker, Zurich calculates the ratio of the total value of the claims over the premiums. The resulting ratio generates a payment. Lower ratios generate higher payments because lower ratios mean that the result is more profitable to Zurich. We do not disclose the actual ratio and payment percentages.

4. Preferred business considerations

• We have unique agreements with some agents and brokers to place particular types of business with us. These agreements may result in the payment of additional commission for such policies. The maximum percentage for contingent compensation is 6.75%. The average paid in 2005 was ___%.

For a more complete explanation of the nature of compensation Zurich pays to agents/brokers—including specific information on the maximum, average and actual ranges of commission paid by Zurich on the specific types of policies we are currently quoting for your company, click here.

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O N   T H E   H I L L
Congress Extends National Flood Program
Borrowing Authority
Active 2005 hurricane season prompts action
to meet policyholder claims.

The Senate has approved legislation that would extend the borrowing authority of the National Flood Insurance Program (NFIP) to $20.775 billion. The Big "I" has actively advocated for the increase, which became necessary after the active 2005 hurricane season.

The Federal Emergency Management Agency (FEMA) distributed a memo to Write-Your-Own companies Nov. 11 informing them that lines of credit were suspended until further Congressional action regarding an extension of borrowing authority. With claims expected to exceed $23 billion, extended borrowing authority was necessary in order to meet consumer needs. Congress subsequently acted accordingly, increasing the borrowing authority to $18.5 billion on Nov. 18. The continued rise in expected claims necessitated the latest increase.

"We are very pleased that the Senate has taken action," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "The hurricane season absolutely overwhelmed the existing resources, which made this action necessary. This bill will help insurance buyers get the service they need and have a right to expect. We thank Congress for moving forward and getting this done for consumers who need and deserve assistance."

Congress extended the initial borrowing limit of $1.5 billion from the U.S. Treasury in the immediate wake of Hurricanes Katrina and Rita, but even this extension was inadequate to meet the anticipated claims.

The Big "I" has actively supported needed reforms to the flood insurance system, including the extension of the borrowing authority and many other proposed changes. It released a comprehensive, 22-point flood modernization agenda in November 2005. Chief among the proposals are the addition of optional business interruption coverage on commercial policies, increases in the maximum coverage limits and the inclusion of additional living expenses coverage for residential policies.

A number of the Big "I"-proposed reforms have been included in H.R. 4973, Flood Insurance Reform and Modernization (FIRM) Act of 2006, passed by the House Financial Services Committee last week and sponsored by Subcommittee Chairman Richard Baker (R-La.) and Ranking Member Barney Frank (D-Mass).

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs.

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O N   T H E   H I L L
Bipartisan Bill on Data Security Moves Forward
Legislation would establish national standards.

A Big "I"-supported bill passed by the House Financial Services Committee would establish national standards on data security.

The bipartisan bill, H.R. 3997, the Financial Data Protection Act, would require state regulators to enforce uniform, federal standards, as related to the insurance marketplace. It was introduced last October by Rep. Steven LaTourette (R-Ohio). It would help safeguard sensitive consumer information, combat identity theft and establish a national standard to notify customers of improper access to personal data.

"We appreciate the House Financial Services Committee moving forward on this crucial issue for consumers," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "We strongly believe that this is the proper approach---using federal standards to establish uniformity in combating a very serious problem, but also relying on the expertise and strengths of state insurance regulators to enforce those standards. We applaud the committee for taking this important step toward safeguarding the security of all Americans’ personal, financial data."

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs.

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L & H   T R E N D S
Stay Abreast of Tax Laws Changes

We’ve all heard the saying "nothing is certain in life but death and taxes." In reality, there is nothing less certain than tax laws. While taxes are a part of the price we pay for living in the United States, they constitute a significant additional expense that is added to every day transactions. Whether it is a personal or business purchase, taxes are part of the equation.

Taxes and tax laws affect life insurance agents’ recommendations to customers trying to meet their financial objectives. For example, in the early 1980s, a popular method to help pay for whole life insurance was to pay the premiums for several years and then borrow the cash values to pay future premiums and deduct the interest payments under a "minimum premium" arrangement. With marginal federal income tax brackets approaching 50% for high-income earners, "mini-dipping" the policy was a tax-advantage until Congress eliminated the ability to deduct the interest.

Now another significant issue looms: the eventual sun setting of 2001’s tax cuts. While many financial advisors are aware of the eventual sunset of the estate tax provisions in 2010, many are largely ignorant of earlier sunset provisions in 2006 for the Alternative Minimum Tax (lower exemptions of $33,750 for individuals and $45,000 for couples versus the current $40,250 for individuals and $58,000 for couples). As a result, more people will pay more in income taxes in 2006. One recommendation that independent agents can offer to affected customers is to maximize retirement plan contributions, which are not included in the AMT calculation. Whether Congress will extend the current tax sunsets in 2006 is up for debate.

Other income tax changes on the horizon include the reversion of higher capital gains rates and the taxation of dividends in 2009, unless they are extended by Congress. For closely held businesses, the increase in the tax rate on capital gains may spur owners to consider selling their businesses earlier then they planned. This might result in business owners having to amend their estate plan and their retirement planning.

Regardless of how Congress moves on the expiring tax laws, its action or inaction will require many people to change their financial activities. Independent agents should keep in contact with customers to see if they can assist with new action plans. That is a certain winning strategy.

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

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