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Bumpy Road Ahead for Asbestos and Med-Mal Reforms |  AIG Continues to Make Headlines | Title Insurance: The Next Global Broking? | Are Sales Contests Next? |  Selling on the Internet | ChoicePoint Faces Lawsuit Over Security Breach | Big "I" National News

O N   T H E   H I L L
Bumpy Road Ahead for Asbestos and Med-Mal Reforms

With the enactment of the Class Action Fairness Act earlier this year, discussion continues on legislation to reform the asbestos and medical-liability systems in 2005. However, questions remain as to how feasible it may be to get either reform through Congress this year.

Senate Majority Leader Bill Frist (R-Tenn.) last week reportedly pledged his absolute commitment to bringing medical-liability reform legislation to the Senate floor in 2005. Frist was quoted as telling the American Medical Association that he would continue to seek a legislative solution to the current medical-liability crisis, noting that malpractice awards lead to high premiums and that trial lawyers, not malpractice victims, often receive the bulk of the awards.

Malpractice reform legislation has passed the House on numerous occasions, but it has failed each time in the Senate due to opposition from Democrats. A Republican leadership aide was quoted as saying “a couple of Democrats” had discussed malpractice reform with the GOP, but that a bipartisan solution had yet to gain any momentum in the Senate.

On asbestos, it is being reported that several Republicans on the Senate Judiciary Committee are demanding changes from the committee’s chairman, Sen. Arlen Specter (R-Pa.). Specter’s draft bill, which he rolled out in February, would establish a multibillion-dollar, private trust fund to compensate victims of asbestos exposure. The proposed legislation would prevent workers from suing their former employers, but compensate them based on the severity of their illnesses, with businesses and insurers paying into the fund for up to 30 years.

Republican concerns about the bill reportedly include issues over which companies would pay into the trust fund and how much they would pay, that the trust fund serve as the exclusive remedy, as well as a provision that would compensate smokers with lung cancer and a history of asbestos exposure, without necessarily having to show asbestos-related lung scarring. Recent reports indicate that Specter may tighten the bill to satisfy fellow Republicans.

The Big “I” strongly supports reforms to the medical-liability and asbestos systems, but has noted some concerns with the possible asbestos litigation legislation.

One issue is that the recent draft of the asbestos litigation legislation contains no aggregate payment levels, which makes it impossible to determine the cost of the proposed trust fund. Insurers are pledged to pay in a maximum of $46 billion to the trust fund. The Big “I” and its partners also seek provisions that would avoid the reversion of claims to the courts. The coalition suggests that the bill should clearly terminate the litigation system and provide for timely implementation of the trust fund to avoid any potential reasons for a return to the tort system. The Big “I” and its industry partners are concerned about paying massive contributions into the trust fund when the current draft of the proposed legislation leaves the door open for a potential return to the legal system.

Cliston Brown(cliston.brown@iiaba.net) is Big “I” director of public affairs/media relations.   | T O P |

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
AIG Continues to Make Headlines

In the days since Maurice “Hank” Greenberg stepped down as CEO of American International Group last week, AIG continues to feel the heat of New York Attorney General Eliot Spitzer’s investigation.

A Barron’s report published Monday, March 21, is garnering much attention in the industry. According to its sources, Greenberg’s downfall was due to his role as “the direct instigator” in a four-year-old reinsurance transaction between AIG and Berkshire Hathaway Inc.’s General Re “to boost AIG’s reserves by $500 million.”

Barron’s sources say that the transaction isn’t the only thing investigators are looking into. The report says that “investigators are beginning to uncover material suggesting that AIG was likewise misusing two reinsurance companies it secretly controlled, Richmond Insurance Co. Ltd. of Bermuda and Union Excess, domiciled in Barbados, to improve AIG’s earnings, underwriting results and capital positions over a period of years by various finite-risk reinsurance schemes.”

The report continues to say, “Among other things, these companies appeared to be convenient dumping grounds for poorly performing property and casualty insurance policies to get them off AIG’s books.”

As news of Barron’s report spread, AIG’s stock took a hit. On Monday, shares fell 2.8% to a five-month low of $58.06, according to CBS MarketWatch. According to the report, this is a decline of more than 20% from the price of the stock in mid-February.

According to Wall Street Journal sources, AIG—lead by new CEO Martin Sullivan—is attempting to “quantify and account for any discrepancies before regulators force them to do so.”

The article says that AIG’s outside auditor, PricewaterhouseCoopers, is reviewing the company’s internal controls to look for “material weakness” in company policies that ensure “all its assets, liabilities and transactions are properly accounted for.”   Areas such as its financial-derivatives operations, which “involves making accounting judgment calls that could distort the company’s bottom line,” have been a focus of attention.

AIG made headlines again when it fired Howard I. Smith, the former CFO, and Christian M. Milton, the former vice president of reinsurance. Both executives, who had been placed on leave last week, were fired for not complying with company policy to “cooperate with government authorities on matters pertaining to the company.”

Although AIG’s Greenberg was toppled from his position in the wake of Spitzer’s scrutiny, it does not appear that Warren Buffett, Berkshire Hathaway’s billionaire chairman, will be targeted by the attorney general. Although both Greenberg and Buffett headed companies involved in the transaction being investigated, The Miami Herald sources say Spitzer has “no plans” to investigate Buffett. It remains to be seen where the investigation of the underlying reinsurance transaction will lead.

What impact have the investigations by Spitzer and other regulators had on agents and brokers? According to a recently released survey by Best’s Review magazine, respondents report an increasing request to provide paperwork and information to clients.

Of the 493 respondents, 39.1% report more frequent contact with clients in recent months, 23.1% report increasing staff training, and 15.2% report recasting marketing materials.

According to the survey, “Clients who formerly handled insurance business in a less-formal manner are requiring greater documentation, while agents and brokers report they must now submit more proposals and bids for the opportunity to provide coverage, respondents said.”

The hiring, firing, resigning and subpoena-issuing fronts saw much activity in the past week. Here’s a rundown on the latest:

• Marsh & McLennan appointed Robert F. Erburu its chairman. The appointment separates the roles of chairman and CEO. Michael Cherkasky was named CEO last year after Jeffrey Greenberg vacated the post in the wake of Spitzer’s investigation.
• Marsh, Inc.’s co-president, Peter F. Garvey, resigned from the company Tuesday “for personal reasons.” William A. Malloy, his co-president, will become Marsh’s president. Garvey worked for the company in various capacities for 25 years.
• Aon Corp. revealed that it received a subpoena from the U.S. Department of Labor concerning compensation from clients’ employee benefits programs.
• Clark Consulting, a national compensation and benefit-design firm based in Illinois, received a subpoena from Spitzer seeking information on, among other things, contingent commission agreements related to retirement product sales.
• ACE Ltd. reported in a U.S. Securities and Exchange Commission filing that it had received 43 subpoenas, interrogatories, civil investigative demands and letters of inquiry relating to investigations of the industry.

Additionally, Heath Lambert Group, a European independent insurance and reinsurance broker, announced plans to charge insurers a flat rate of 1% of total premiums for services provided.

“(The rate) is equitable and transparent and at 1%, not excessive,” Adrian Colosso, the group chief executive said in a statement. “It is right that we are properly rewarded for work carried out on behalf of our insurers that is separate from work undertaken for our clients.”

On a final note, though it may be unrelated, Reuters reported Tuesday that the German cartel office is about to fine industrial insurers, including Allianz, for price fixing.

Jennifer Sikorski  (jennifer.sikorski@iiaba.net) is  IA’s associate editor. | T O P |

 V I E W :   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
Title Insurance: The Next Global Broking?

California Insurance Commissioner John Garamendi issued nine subpoenas March 9 in his investigation into an alleged illegal kickback scheme in the title insurance industry.

“There is growing evidence that title insurers and others have scammed consumers in the name of greed,” Garamendi said. “Through these subpoenas and through my investigation, I intend to find out how widespread this problem is and put a stop to this illegal activity.”

With premiums often exceeding $1,000 for a typical house and hundreds of dollars in referral fees for those in certain locations, it looks like title insurance could become a big focus of state attorneys general. Just look at loss ratio for title insurance versus the entire property-casualty industry, and you can imagine where this might end up.

Let’s examine some title insurance facts:

• Total premiums in United States were $15.7 billion in 2003 with loss ratios averaging 4.1% in 2003.
• Costs of title insurance vary by locality but rates typically are about $4 per $1,000 of home value.
• Title policies provide defense coverage and indemnity for financial losses due to an undetected lien or other encumbrance attaching to real property.
• Like property and flood insurance, coverage is almost always required by the lender but, unlike these coverages, most lenders’ title business ends up concentrated with one or two providers. This in spite of federal laws prohibiting steering of title business (RESPA).
• Operating expenses and profits of title insurers can exceed 90% of premiums with commissions to title agents routinely exceeding 50% of premiums.
• Title agency profits can be lucrative, but bank-owned title agencies typically exceed the average with profit margins exceeding 50%, according to a Western BankingMagazine. Bank-owned agencies can exploit access to their pool of real estate transactions without need to pay typical “title reps.”
• Title premiums are paid upfront and cover insureds as long as they own the property. However, the lender likely will require a new title policy (and a new premium…and a new commission) every time a property is transferred.
• The refinancing activity of recent years has been a huge boon to those in the title insurance business, and title insurance premiums have more than doubled since the 1990s from $6 billion to $16 billion today.

Where to go from here? Only an attorney general knows for sure, but title insurance has great potential for popular interest as it affects virtually every homebuyer. In addition, I know of no other issue that puts so many of society’s barristers at odds with each other. In the title industry, lawyers have roles as title agents, regulators, legislators and litigators—not to mention title insurance purchasing, home-owning consumers as well.

Where else can you find a highly regulated industry that has been so accommodating to lawyerly business interests? There are actually state insurance laws that exempt lawyers from any pre-licensing testing and continuing education with respect to title insurance sales. This round of interest in insurance by our state attorneys general could be very interesting indeed.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big “I” Advantage, IIABA’s for-profit subsidiary. | T O P | 

 V I E W :   L & H   T R E N D S
Are Sales Contests Next? 

The recent investigative environment has placed virtually every aspect of the insurance industry under the microscope. Now, the Wall Street Journal reports that the National Association of Securities Dealers (NASD) has proposed increasing suitability and disclosure standards for variable-annuity sales to the Securities and Exchange Commission (SEC).

In the WSJ article, Elisse Walter, NASD’s executive vice president for regulatory policy, said the group is trying to determine whether its policy goes far enough. “We’re looking at the scope of our contest rules,” she says.

At the very heart of the sales contest issue are questions about the appropriateness of sales incentives. The presumption is that sales incentives can result in an inappropriate product recommendation. This issue is not necessarily limited to the insurance sales; it pertains to our economy in general.

Can abuses occur during a sales contest? Yes, in some instances. From a personal standpoint, I once helped service some orphan life insurance policies (i.e. the former agent had departed the agency). When a policyholder requested to change a beneficiary, I reviewed his life insurance policies that had been sold in our career agency. The insured had four $25,000 life insurance policies naming his wife and three children as separate beneficiaries. Further, I noticed that they had been applied for on the same day. When I asked him why he had four separate policies (knowing that the $100,000 rateband had a lower cost per thousand), he said that his agent said it was a convenient way to name beneficiaries. I told him that could be accomplished under one policy.

I went back to the agency, scratching my head trying to figure out why the agent had gone to the trouble of applying for four separate policies. During my research, one of the administrative people told me that she recalled that the insurance company had run a contest and the eligibility was tied to the number of policies that the agent had issued during that particular month. Needless to say, I wrote a letter to the home office, and the insured received a re-issued $100,000 life insurance policy with a credit for the difference in lower premiums—and I had received an education.

In this example, it’s important to note that the agent was of course a short timer. The real problem was that the agency didn’t have someone question the applications at the time as to why four separate policies were issued to the same person on the same day.

Am I opposed to sales contests? Of course not. Incentives are part of what our economy is founded on. However, there is a lesson here for independent agencies that have sales contests: You need to have oversight of the business that is produced so that someone doesn’t take advantage of the rules. In this case, having the contest based solely on policy count was perhaps asking for trouble. Given the attention that our industry is attracting, it’s more important than ever to review your (or carriers that you use) criteria for sales contests in the agency.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine. | T O P |

F O R M S   &   S U B S T A N C E
Selling on the Internet

I first met Gary Savelli while writing an article for Independent Agent magazine about selling on the Internet. I don’t recall how Savelli came to my attention, but we’ve been sharing ideas ever since.

Savelli is one of the few agents I’ve met that really “gets it” when it comes to Internet sales. By “gets it,” I don’t just mean that he understands why the Internet can be a valuable sales tool, but he also knows how... and, boy, does he “get it” (income that is).

The last time I corresponded with Savelli, his conservative estimate of commission income just from his Web site was in excess of $100,000. Most agencies probably aren’t netting 10% of that amount in premium income from their Web sites. In some months, Savelli’s four-person agency booked more than 100 policies and, since he likes being a small agency, he has cut back to about 50 to 75 a month by not updating his Web site on popular search engines.

Savelli launched his Web site by marketing nonstandard auto. Since that time, he has targeted homeowners, special event coverage and bonds. He’s been successful in each market by building content that interests each market segment and by becoming something of an expert in manipulating search engines to drive traffic to his Web site.

Despite his slogan, “Lowest Prices on the Internet” (which does open the door), Savelli has discovered that it isn't the lowest price that closes the deal, but the promise and delivery of superior service that distinguishes him from the competition. Here’s what Savelli had to say recently:

“I would say 50% of people I quote have also checked elsewhere on the Net. When I come back with superior personal service, quick responses via e-mail, have a toll-free number for them and tell them I can place coverage instantly in most cases, I get the sale. One way not to be successful on the Net is to deliver the ordinary. My clients are shocked that I know their names when they call, and sometimes even where they live or what car they drive. I am firmly committed to this point: Insurance on the Internet will never be fully automated, certainly not for the average broker or agent. People need to talk to someone who cares. When you merge a personal touch with a technical edge, you have a winner.”

To visit one of Savelli’s low-tech and low-cost—but highly effective—Web sites, go to www.basicwest.com. To learn more about how he sells on the Internet, visit his marketing site just for independent agents at www.insurance-web-sales.com.

If you want to read more about Savelli’s success story in his own words, read his VU articles, “How to Sell Insurance on the Internet...the Old Fashioned Way” and “The Birth of YourAgency.com.” For several other articles on this subject, including samples of good and bad Web sites, visit the Web Design section of VU’s Technology library.

Bill Wilson (bill.wilson@iiaba.net) is the Big “I” director of Virtual  University. | T O P |

P & C   T R E N D S — L E G A L   A N A L Y S I S
ChoicePoint Faces Lawsuit Over Security Breach
Ga. Insurance Commissioner Stipulates New Business Practices

ChoicePoint, a well-known provider of data and credit scores for the insurance industry and business community, is the subject of class action lawsuits filed in the Federal District Court for the Central District of California (covering parts of southern California, including Los Angeles), as well as a regulatory action in one state.

The class action lawsuits were filed on behalf of classes of people who purchased or acquired ChoicePoint securities between specified periods described below. Defendants include ChoicePoint; Derek Smith, ChoicePoint’s chairman and chief executive officer; Douglas Curling, ChoicePoint’s president, chief operating officer and director; and Steven Surbaugh, ChoicePoint’s chief financial officer. One complaint also names as a defendant Darryl Lemecha, ChoicePoint’s chief information officer.

The complaints allege that the defendants violated various sections of the federal securities laws that prohibit manipulation or deception of the investing public in connection with the purchase or sale of securities. They also allege that the company disseminated materially false and misleading statements regarding its security results and operations between specified period, which induced people to buy or retain the company’s stock.

The issues underlying these lawsuits have gotten attention from regulators as well as Congress. For instance, the Georgia insurance commissioner ordered ChoicePoint to improve security measures within 90 days after Feb. 24, 2005 or face removal from the Georgia approved list of credit scoring models and notification to insurers that ChoicePoint’s information cannot be used for underwriting and pricing. Further, the same commissioner’s order requires the company to: (1) Provide immediate notification to customers of any future security breaches that result in the release of confidential information; (2) Establish a rapid response plan for security problems; and (3) Perform a system-wide internal audit using an independent security firm to verify that improved security measures are implemented.

Congress also is monitoring the ChoicePoint security thefts. The House of Representatives Energy and Commerce Committee held hearings March 15, 2005 to look into the security breaches at both ChoicePoint and Lexis Nexis, another provider of identity data which also has suffered from a recent security breach.

Case History

The period covered by the lawsuits begins on April 22, 2004, the date that ChoicePoint announced its first quarter results reflecting revenue growth for the same period in 2003, and ends March 3, 2005 since it was the last day before ChoicePoint filed its Form 8-K with the SEC, which described the recently revealed security problems at the company. The Form 8-K also announced that ChoicePoint was discontinuing the sale of certain information products that contain sensitive consumer data, except where there is a consumer-driven transaction or benefit, or where the products support a government or law enforcement purpose.

The complaints allege that in September 2004, criminals illegally obtained detailed information regarding consumers’ names, addresses, social security numbers, driver’s license numbers, credit reports and other public record information. Although ChoicePoint reportedly was aware of this security breach in September 2004, the security breach did not become the subject of news reports until Feb. 15, 2005, and the wide extent of the breach was not publicly acknowledged by ChoicePoint until an Associated Press story on Feb. 18, 2005. In addition, the CEO and CFO made statements in The LA Times on March 3, 2005 that this was the only security breach of its kind in the company’s history, despite a 2002 guilty plea by fraud artists who accessed at least 7,000 ChoicePoint records.

The complaints summarize quarterly results by ChoicePoint, including on:

• April 22, 2004, when it reported revenue growth as having increased 11% over the same period in 2003
• July 20, 2004, when it reported revenue growth as having increased 16% over the same period in the 2003
• Oct. 19, 2004, when it reported revenue growth as having increased 18% over the same period in the 2003
• Jan. 26, 2005, when it reported revenue growth as having increased 16% over the same period in 2003

The complaints include reports that by Wednesday, March 2, 2005, the trading price of the stock fell $.28 to $40.67, characterized as a fall of “nearly 11% since Feb. 14, just before the latest security breach became known.” They add that on news of the company’s March 4, 2005 Form 8-K filing with the SEC, shares fell an additional 6.5%, closing at $37.65.

The complaints also allege that the CEO and COO sold some of their personal shares of ChoicePoint stock at prices that were inflated due to these false and misleading statements.

Future Actions

The filing of the lawsuits started the formal process of proving the allegations in them to be true or false. Each side will have the opportunity to obtain and review the evidence and assert its position through legal documents filed with the court. If the matters are not resolved through agreements by the parties or dismissal, they will proceed to trial.

Lawsuits filed in state court can have a binding effect only on the people and businesses in that state, and the outcome of the actions in Federal Court are binding only on those in that district. Speculation about the outcome of any lawsuit, especially without access to all the evidence and facts, is conjecture.

IIABA will continue monitoring this issue and provide updates about significant developments. | T O P |