T H U R S D A Y ,  M A R C H   2 9 ,  2 0 0 7 

Big “I” National News

P&C Trends

Record-High Profits Lead to Record-Low Impairments 
A.M. Best reports low insolvencies among insurers.

The p-c industry’s record-setting profitability paired with low catastrophe losses in 2006 led to little insolvency among insurers and kept the impairment rate at an all-time low, according to a recent report by A.M. Best.

There were only 15 impaired insurers last year, which translates into an insolvency rate of 1-in-233 companies---half the historical rate for the past 38 years A.M. Best has been studying impairments. The rate did rise slightly, up from 13 companies in 2005, and there is still the possibility of a few more insurers turning up impaired for the year, but A.M. Best expects the number to remain below average.

“Two-thirds of the impaired companies in this study were members of the Poe Financial Group of the Vesta Group” the company says. “Going into the 2004-2005 hurricane seasons, the two groups were too vulnerable because of rapid growth and poor management to be able to withstand the back-to-back catastrophe losses. After the storms, several companies in those groups were left with no reinsurance and/or with capital and surplus below acceptable regulatory levels.”

To quantify the 2006 impairment rate, the number of insolvencies equals a rate of 0.43%, which is up from 2005’s rate of 0.38% and down from 2004’s rate of 0.52% and A.M. Best’s historical average rate of 0.86%.

The life-health industry is also seemingly poised for a new record low number of insolvencies with only two l-h insurance company failures reported for 2006. The low number means there is only a 1-in-769 (or 0.13%) insolvency rate among l-h companies, down from 11 in 2005, which follows the seven-year trend of below-average impairments for the industry.

“What we found with most of the companies both in the p-c impairment and also with the life impairment is that those who became impaired either had a vulnerable A.M Best rating or were not rated by A.M. Best,” says John Williams, who co-authored the study with Carol Ann King.

While A.M. Best’s report sheds an optimistic light on the industry’s outlook for insolvencies, agents still need to be wary of getting too wrapped up in the successes of last year.

"The insurance industry did have record high profits---record profits resulting from multiple factors with the most important being the industry was at the apex of a hard market,” says Mark Wolf, Big “I” assistant vice president of E&O operations. “The market is now softening rapidly and no one believes there will not be any natural disasters in 2007-2008. With the return of the soft market, profits will drop once again and insolvencies will increase as they did at the end of the last soft market with the lower-rated companies at the highest risk. Insurance agents are vulnerable to E&O claims for placing their customers’ insurance with carriers at risk. Keep your eyes open as the market softens as we head down the slippery slope once again."

Agents should also be cognizant of the effects the changing market will have on non-carrier, risk-bearing entities, according to Sabrena Sally, senior vice president at Westport Insurance Corp.

“In addition to the potential impact of the soft market on A.M. Best's ratings of insurance carriers, agents should also be aware of the possible affect of soft-market profits on non-carrier, risk-bearing entities (such as self-insured trusts),” she says. “Determining the financial health of a risk-bearing entity without the assistance of an industry-recognized rating agency can be challenging. In addition, these entities are usually not protected by any type of guaranty fund, and errors & omissions claims against agencies arising from insolvencies of these entities are not covered by some errors & omissions policies."

A.M. Best has identified one p-c insolvency for 2007, Vanguard Fire & Casualty Co., which was placed in rehabilitation by Florida regulators in January. Vanguard, primarily a homeowners insurer, was suffering from cash-flow problems after underwriting losses of $15 million and $23 million in 2005 and 2004 respectively. The losses were most likely due to the sever hurricane seasons.

A.M. Best’s full reports on insolvencies in the p-c and l-h industries are available for purchase at www.ambest.com.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

On the Hill

Highlighting Natural Disaster Risk
Big“I” testifies on need for national solution.

The Big “I” testified Tuesday on the need for a national solution for natural disaster coverage, reminding Congress that natural disasters aren’t just a coastal issue.

Andrew Valdivia, Big “I” state national director from California and the president of White and Company Insurance, Inc. in Santa Monica, Calif., represented the association before the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee. Valdivia noted that during the past several years, independent agents and brokers have witnessed how substantial natural disaster losses have diminished the insurance industry’s capacity and appetite for insuring catastrophic events. This shift has moved beyond homeowner’s coverage and now includes the commercial insurance market as well.

“Any discussion concerning the solution to insuring against future natural disasters starts with admitting there is a problem,” Valdivia says. “The Big ‘I’ believes it is no longer enough to say that the private market can handle catastrophic risks when coverage is not sufficiently available at affordable rates. In fact, it is our experience that private market coverage is scarcely available at any rate in some areas---this is fast becoming an availability problem rather than an affordability problem.”

Natural disaster risk poses a looming crisis for consumers, Valdivia testified. As a conduit between consumers and insurers, the Big “I” recently joined the Natural Catastrophe Policyholders Coalition as an ex-officio member. The goals of the coalition are to create a forum to share information and to develop and promote policies to ensure the availability and affordability of catastrophe insurance to both homeowners and businesses.

Valdivia emphasized that hurricanes are only one of the many catastrophic risks the nation faces. According to the Insurance Information Institute, tornadoes, earthquakes, mudslides, blizzards and other catastrophe events combined have accounted for over half of U.S. catastrophe losses in the past 20 years. The third most costly natural disaster on record was the Northridge Earthquake in 1994, with $16.5 billion in losses.

“Whether it is tornadoes in the Midwest, earthquakes in California or ice storms in the Northeast, we all face some risk of natural disaster, and it often takes only one or two events in a particular area for the homeowners’ insurance market to be dramatically affected,” Valdivia says.

Valdivia expressed the association’s support for H.R. 330, the Homeowners' Insurance Availability Act, sponsored by Rep. Ginny Brown-Waite (R-Fla.), and its willingness to consider other approaches. The legislation would allow private insurers to purchase, at auction, reinsurance contracts directly from the U.S. Treasury to cover natural disasters that are equal to or greater than a one-in-100-year event.

“Despite our longstanding position that the insurance market is best served by limited federal involvement, we believe that a federal solution to the issue of natural catastrophe insurance is necessary to help provide capacity and fill a void that the private market cannot and will not service,” he says. “We believe that there is a very limited and appropriate role for the federal government, and we are open to supporting proposals that increase insurance availability and affordability in catastrophe-prone areas.” 




P&C Trends

Dodging Disputes
Survey finds industry needs technological advancements to prevent claims disputes.

Post-Sept. 11, 2001, insurers have been trying to enact measures to prevent the lengthy claims dispute that followed the attacks on the World Trade Center, but the industry still has a long way to go, according to a recent survey conducted by U.S. Insurer and Q.Know Technologies, Inc., a global provider of information management software.

The third annual survey, designed to determine whether business technology is keeping up with the industry and regulatory demands, included responses from 140 insurance and reinsurance executives. Of those respondents, 64% said they believe the industry has not improved contract processes enough to avoid a dispute similar to the one prompted by terrorist attacks on Sept. 11, 2001.

Insurance on the twin towers was incepted before the contract was finalized, so when the planes hit shortly after, the contract’s wording bound the insurer and reinsurer to the property. Today that issue remains unresolved and it seems insurers are still struggling with policy wording---54% of survey respondents said they are only somewhat certain their policy wording will be in place by the time coverage is incepted, 31% said they are completely confident and 15% said they are less than confident or not at all confident.

But the industry has been working to improve efficiency and improve contract certainty through initiatives such as the 2002 Sarbanes Oxley act. That effort appears to have had some effect as 68% of those surveyed said their company is under increased administrative and underwriting pressure to keep up with new regulatory demands, however, the time-consuming documentation process is still hindering a lot of insurers.

When asked what percentage of their day is devoted to organizing, retrieving, tracking and managing sensitive documentation, 21% of respondents said they spend 50% to 100% on that task alone. Technological changes are desperately needed in order to correct this problem, according to Richard Meyer, chairman and co-founder of Q.Know Technologies, Inc.

“The survey identified the No. 1 factor (needed for technological improvement) as ’better/faster access to deal documents,’” Meyer says. “Having spent my career in the industry, I am keenly aware of the pressure the industry faces. Particularly with the advent of e-mail, electronic documents are everywhere and in hundreds of different forms---e-mail, spreadsheets, PDFs and presentations on laptop and handhelds---just to name a few. Today, all of that information relating to any client or deal is discoverable---making the process of keeping track of it all very difficult, at best. Time spent tracking down ‘the latest version’ or the ‘one we actually signed’ is time wasted. Underwriters and brokers need technology that can bring each piece of electronic information together in a logical and intuitive manner that harkens back to the paper files of old---one location, accessible to all relevant parties.”

A centralized system that maintains all electronic deal documents, including e-mail, and is accessible to everyone in an organization was high on respondents’ wish lists with 91% saying it would be an extremely or somewhat valuable tool. Respondents also identified improved archival systems, larger server capabilities and new e-mail platforms as improvements needed to provide relief to workers.

According to Meyers, before the industry can gain ground on writing solid contracts, the technological world needs to catch up with the growing needs of insurers and develop better software to better serve insurers---not confuse them.

“The survey findings are very much in keeping with what we are hearing from Q.Know’s clients and prospects, which is that technology has not kept up with the industry’s need for straightforward, easy-to-use software that mirrors the underwriting and contract processes,” Meyer says. “This leaves companies either searching for or trying to build in-house programs that their management will adopt and their underwriters use. Identifying information management software that meets the needs of the industry is made only more complicated as the market becomes crowded with technology that claims to address regulatory and underwriting concerns, but doesn’t make good on its promise.”

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

On the Hill

New Flood Bill Hits Capitol Hill
Legislation includes important improvements to flood coverage.

House Financial Services Committee Chairman Barney Frank (D-Mass.) and lead co-sponsor Rep. Judy Biggert (R-Ill.) introduced the Flood Insurance Reform and Modernization (FIRM) Act of 2007 earlier this week.

The bill contains a number of Big “I”-backed provisions, including: increasing the National Flood Insurance Program (NFIP) borrowing authority to $21.5 billion; increasing funding for flood map modernization; increasing the maximum coverage limits; optional business interruption coverage; additional living expenses coverage; optional replacement cost coverage for contents; optional finished basement coverage; and increasing the policy flex band from 10% to 15%.

“We are very pleased that Chairman Frank and Rep. Biggert have introduced comprehensive flood insurance reform,” says Charles Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We hope that the Financial Services Committee and full House will move quickly to pass this vital legislation, which will not only help consumers who are vulnerable to flooding, but also shore up the NFIP for many years to come.”

In particular, the increased maximum coverage limits has been a top issue for independent insurance agents and brokers. This increase will allow consumers to better insure against losses due to flooding.

“Hurricanes Katrina and Rita clearly showed that homeowners and businesses need higher coverage limits by the NFIP in order to properly insure their properties,” says John Prible, Big “I” assistant vice president for federal government affairs. “An increase in the maximum coverage limits will better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause, and we’re grateful that this increase was included.”

The inclusion of optional business interruption coverage is also crucial to Big “I” members and their commercial customers, many of whom lost their businesses in the areas affected by the hurricanes last year.  Additionally, the inclusion of additional living expenses will help consumers make ends meet in the immediate aftermath of a flood loss.

“Many Big ‘I’ members and the business customers they serve had to work out of their homes because their offices had been destroyed,” Symington says. “This is a prime example of why business interruption coverage is crucial to our members and to small business people across America. The additional living expenses coverage, meanwhile, will provide consumers with greater economic security during the often bewildering post-flood period.”

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, 23-point flood modernization agenda in November 2005.

L&H Trends

Learn Your Customer’s Business to Grow Yours

Are you a good salesperson---or a great one? The best salespeople actually don’t sell anything, they certainly don’t push anything onto their customers and they are not fast talkers. What are the most significant characteristics of really successful sales people?

First, they are actually meeting with as many qualified prospects as possible each and every week. A qualified prospect is someone that based on preliminary information represents a realistic opportunity to be able to purchase the salesperson’s product or service. The old adage that a good salesperson could “sell an air conditioner to someone living in Alaska” is a misnomer. A good salesperson would be selling air conditioning to someone that lives in a warm climate because they would make sure the prospect lives there.

Second, good salespeople are good listeners. No prospect is going to buy an insurance policy based on the salesperson’s values and objectives. Yes, it’s true that people are required to purchase auto insurance (although the mandated limits can be puny) and that a lender will require a homeowners policy to protect the mortgage, but for most life/financial services sales, the agent has to solve the client’s needs and the only way to do that is to listen. Of course, not every prospect is completely candid but good agents look for clues to other concerns.

The difference between a good salesperson and a great salesperson is that a good salesperson will know their products and riders inside out. A great salesperson will not only know their own product information but they are knowledgeable about their customer’s businesses so they can tailor their recommendations to fit the situation. For example, small advertising and architectural firms can experience cash flow crunches during periods where they are awaiting payment of large invoices. Also, when large projects or accounts cease, they may be required to trim staff, particularly employees dedicated to those accounts. In such instances, they need flexibility to handle expenses until replacement revenue is realized. A good agent will find solutions that may not obligate the customer to fixed overhead costs and offer products that are portable so that terminated employees can keep their life insurance and/or disability coverage intact.

Agents who specialize in dealing with physicians know that when doctors first start out, they may have considerable school loans and start-up costs. With those factors in mind, agents realize they need to protect the doctors’ earnings potential, but that they also need to minimize the cost of the insurance. Permanent policies can be purchased (term convertible to permanent coverage without evidence of insurability) when the doctor’s income increases to meet the larger premium payments. Thus an agent putting the customers’ needs first will find they have a client for life. Be sure to learn as much as possible about your customer’s needs.  In fact, independent agents have an advantage since their agency may be handling the customer’s commercial insurance needs and thus have a lot more intelligence about the company.

Remember, the best salespeople are problem solvers. Information is the key to effectively solve the customer’s needs.

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