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 Big "I" National News

I N   T H E   S T A T E S
Regulators Consider Life After TRIA
Big “I” testifies at NAIC hearing
on long-term terrorism solutions.

Less than three months after the extension of the Terrorism Risk Insurance Act (TRIA), a committee of insurance regulators held a lengthy hearing in New York City yesterday to begin contemplating how the industry will handle terrorism risks after the program’s scheduled demise at the end of 2007. The program was extended an additional two years in December 2005, and Congress has suggested that it has little appetite for continuing the program further in its current form. 

The insurance industry has never been known for its solidarity on public policy issues, but there was surprising unanimity voiced by the parade of witnesses that testified over more than six hours.

The Big "I" representative—New York City native Sharon Emek—encapsulated much of the discussion in her comments before the group. She observed that terrorism poses a unique risk that cannot be assessed in traditional ways. The industry knows extremely little about where or when terrorism might occur; how it might occur; how often it might occur; or the nature, effects and costs of such an attack. 

Given the nature of terrorism and the industry’s inability to make meaningful assessments or judgments about possible terrorist events, Emek and others called for the nation’s policymakers to develop a long-term solution that includes some form of participation by the federal government. She reminded the regulators that former Federal Reserve Chairman Alan Greenspan and other notable experts who examined the issue have come to the conclusion that the private insurance market is in no position to handle the unpredictability and possible immense size and scope of terrorist attacks. 

A provision in the Terrorism Risk Insurance Extension Act of 2005 was included to spur discussions of more permanent solutions, and the law specifically requires the President’s Working Group on Financial Markets to analyze the long-term availability and affordability of insurance for terrorism risks and report its findings to the Congress by no later than Sept. 30. As part of this review, the President’s Working Group has been directed to consult with a variety of interested and impacted parties, including the National Association of Insurance Commissioners. 

The committee hosting yesterday’s hearing—the Terrorism Insurance Implementation Working Group of the National Association of Insurance Commissioners—is preparing to submit comments to the Treasury Department. IIABA also will be submitting comments to the Treasury in the coming weeks. 

If yesterday’s hearing is any indication, both the regulators and the industry will be urging Congress to implement a long-term solution to the issue that enables the industry to build much needed capacity and spread the risks associated with terrorism. Discussions about long-term solutions are already taking place, and some degree of consensus will be essential if the issue is to be addressed in a meaningful manner before the existing program expires. 

As Emek noted yesterday, the need for action is more urgent than many might realize, and it will not be long until insureds are renewing policies with contractual terms that extend beyond Dec. 31, 2007. If a solution is not in place well in advance of the end of next year, insurance markets once again will face significant disruption and uncertainty and insurers can be expected to exclude terrorism risks from their policies. 

Although the United States has thankfully been spared from further events in recent years, the threat of terrorist attack is as great as ever, and our country and industry must take the steps necessary to protect itself from a similar future event.  As part of that preparation, we must take the steps necessary to protect our national economy, and we must ensure that terrorism insurance is available and affordable to our nation’s businesses. 

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

 V I E W :   P & C   T R E N D S
Demographic Trends: The Hard and Soft Truth

Which trends should your agency react to, and which trends should not faze you? When it comes to demographics trends, it’s time to sit up and take notes.

The March 16 issue of IN&V tackled several technology changes on the horizon and described the difference between "soft" and "hard" trends. Hard trends usually are driven by technological, demographic or legislative/regulatory changes that are permanent and often transform the reality with which we must deal. Soft trends are apparent today and may or may not continue, so it’s not smart to base decisions on them.

Many demographics-related hard trends are occurring. A large percentage of baby boomers will reach the traditional retirement age during the next 10 years. We know this is going to happen. We also anticipate that baby boomers will differ from prior generations by continuing with active lifestyles into retirement, often re-engaging with new work, including part-time positions, in-home businesses or volunteer work. This latter prediction is a soft trend, and its implications are that baby boomers will continue to be important insurance consumers for many years.

During this same timeframe, Generation X and Y will be in their prime child-rearing years, owning homes and running businesses. They will have needs similar to their parents’ at this stage of their lives, but they are likely to have different expectations than their parents, which service providers will have to ascertain and fulfill. We anticipate that these consumers—having grown up with computers—will look for agencies that are full participants in the networked world and are readily accessible to them 24/7 to accommodate their busy lifestyles.

We also will see the United States continue to become more ethnically diverse. There will be significant numbers of single parent and other non-traditional households. In traditional households, it will continue to be the norm for both spouses to work, and women increasingly will hold managerial positions. In this environment, time will continue to be in short supply for most consumers and businesses, and they will favor business relationships that save rather than cost them time. Agents, of course, are in an excellent position to save their customers’ time.

Technology futurist Daniel Burrus, speaking at a recent ACT meeting, made a point that struck me as a particular opportunity for independent agents and brokers. In spite of the growing pervasiveness of technology, ours remains essentially a human economy that is based on relationships. Trust continues to lie at the heart of all effective relationships, and agents are well positioned to build trust relationships with their customers. Today, more than ever, you must earn trust because of the high degree of public skepticism, based on perceptions that many businesses have not lived up to their promises, whether to customers, employees, stockholders or insureds.

Burrus was very excited about the direction many agencies are headed in to transition their staffs into the role of trusted advisors who actively work on nurturing their relationships with their customers. These agencies are in the process of using new technology to automate their processing functions wherever possible, freeing up their service personnel to perform this new role. These agencies also are beginning to track customers’ preferences, such as how they want to be communicated with and what customized services they want to receive.

I urge agents to seize this opportunity to strengthen their customer relationships by specifically focusing on building the levels of trust they have with them. To what extent do current communications and procedures, as well as contemplated actions, build client trust or detract from it? Agents should consider addressing the trust issue directly with their customers, asking them what it would take to move trust to the next level.

Jeff Yates (jeff.yates@iiaba.net) is ACT’s executive director. This article reflects the views of the author and should not be construed as an official statement by ACT.

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 Enters into Additional Settlement
How will new settlement affect independent agents and brokers?

Zurich Financial Services (ZFS) announced March 27 that Zurich Holding Company of America, Inc. (Zurich Holding) and its subsidiary Zurich American Insurance Company (ZAIC) entered into an Assurance of Discontinuance and Voluntary Compliance with the state attorneys general for New York, Connecticut and Illinois to resolve their investigations concerning practices in the marketing, sale, renewal, placement or servicing of insurance and reinsurance and their accounting and public reporting practices, including those relating to nontraditional and finite insurance and reinsurance in addition to entering into a stipulation with the State of New York Insurance Department relating to its investigation of the same.

The agreement and stipulation are distinct from the AG settlement agreement announced last week between ZAIC and the state attorneys general from California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania, Texas, Virginia and West Virginia and the settlement with insurance regulators that sign on to it.

The assurance agreement and stipulation include a number of examples of allegations that "Zurich US and ZFS unlawfully deceived policyholders, regulators and other authorities and shareholders by: (a) participating in schemes to steer business; (b) participating in rigging of bids for excess casualty insurance through Marsh & McLennan, Inc. and Marsh Inc. and (c) improperly using insurance transactions to bolster the quality, quantity and stability of their clients’ and ZFS’s earnings."

While the assurance agreement states that Zurich Holding and ZAIC are neither admitting nor denying the allegations described above, they entered into it with a statement of apology.

Among the business terms of the assurance agreement and stipulation:

1. Monetary fines and penalties. Zurich Holding must pay $88,000,000 into an Excess Casualty Fund to be paid to Zurich US’s policyholders who purchased or renewed Zurich US’s excess casualty policies (excluding excess workers compensation policies) through Marsh from Jan. 1, 2000 through Sept. 30, 2004. It also incurs a $65 million fine or penalty for improper conduct, of which $39 million will go to the State of New York, $13 million to the State of Illinois and $13 million to the State of Connecticut.

2. Disclosure notice. Starting six months from the date of the assurance agreement, Zurich US is required to: i) send a notice with an insured’s policy to insureds in the United States stating that information concerning the company’s compensation policies can be obtained from a Web site or toll-free number; and ii) make operational the website and toll-free number. For the purpose of the assurance agreement:

Compensation means "anything of material value given to a producer including, but not limited to, money, credits, loans, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses," including contingent compensation.

Contingent compensation means compensation contingent on a producer: i) placing with Zurich US a specific number of policies or dollar value of premium; ii) achieving with Zurich US a specific level of growth in number of policies or dollar value of premium; iii) meeting a specific rate of retention or renewal of in force Zurich US policies; iv) placing or maintaining business with Zurich US to achieve a specific loss ratio or other measure of profitability; v) giving Zurich US preferential treatment in placing business (such as last looks, first looks, right of first refusal or limiting the number of quotes from other carriers); or vi) obtaining anything else of material value from Zurich US.

Compensation excludes "customary, non-excessive meals and entertainment expenses" and Compensation paid to captive or exclusive Zurich US employees for lines or products clearly identified in marketing materials as being from Zurich US.

3. No payment of contingent compensation for excess casualty insurance. For 2006 through 2008, Zurich US offices situated and issuing policies in the United States cannot pay any contingent compensation to producers relative to placements of excess casualty insurance policies, and ZFS’s insurance subsidiaries that it has a controlling interest and which have offices and policies issued outside the United States cannot pay contingent compensation to producers relative to placements of excess casualty insurance policies issued or renewed to insureds domiciled in the United States where the policy is principally associated with covering property or operations located in the United States. Starting in 2009, payments are subject to the requirements described below.

4. Additional limits on payment of contingent compensation. Zurich US agreed not to pay contingent compensation on any insurance line (or product/segment) if: i) insurers not paying contingent compensation on that line (or product/segment) (including to direct writers and insurers employing only captive agents for that line (or product/segment)); and ii) insurers with signed agreements with the New York attorney general or other state attorneys general with this restriction against paying contingent compensation for that line (or product/segment), together represent more than 65% of the national gross written premiums in that particular insurance line (or product/segment) in the calendar year for which market share data is most recently available. If these conditions are met, this restriction goes into effect on January 1 of the next calendar year. The basis for the 65% market share calculation is information from the National Association of Insurance Commissioners, A.M. Best or another agreed upon source if needed data is unavailable from either of those. If the 65% market share drops below 60% in any subsequent calendar year, Zurich US can notify the attorneys general of the change and pay contingent compensation if the attorneys general do not object within 60 days to Zurich US’s determination that the market share is below 60%.

5. Support legislation/regulations to abolish contingent commission.

6. Implement standards of conduct and training. Zurich US must implement written standards of conduct relative to compensation paid to producers consistent with the terms of the assurance agreement, subject to approval of the attorneys general and superintendent. Those standards of conduct are required to include training in business ethics, professional obligations, conflicts of interest, antitrust and trade practices compliance, and record keeping.

7. Cooperation with attorneys general and superintendent.

8. Controls on finite and non-traditional reinsurance. ZFS and its insurance subsidiaries will adopt policies to prevent transactions designed solely to manipulate accounting results, transactions with insufficient risk transfer to improperly qualify for reinsurance and transactions that have undisclosed side agreements.

9. Reinsurance reporting. Starting July 8, 2006, for a five-year period, ZFS annually must report by May 1 to the superintendent about reinsurance contracts in accordance with detailed requirements in the assurance agreement and stipulation.

The assurance agreement and stipulation are complex and include many terms and details. For a more detailed look, go to the Legal Advocacy page of www.independentagent.com under IIABA/Industry Information & News in the section called Litigation (and Related Materials): Involving Zurich.

Implications for Agents and Brokers

The assurance agreement, like the settlements announced last week between Zurich and a number of attorneys general and between Zurich and insurance regulators for participating states, does not just affect Zurich US or ZFS and its insurance subsidiaries—it also impact agents and brokers doing business with the company.

Although the assurance agreement was entered into only by the attorneys general for the states of New York, Connecticut, and Illinois, Zurich advised IIABA that the disclosure notice will be sent to policyholders in all states. As a result, agents and brokers will want to be familiar with the disclosure notice and information provided on the Web site or through the toll-free number so they can be prepared for questions from policyholders. Implementation of this disclosure currently is under development by Zurich.

Agents and brokers also may be impacted by the prohibition in the assurance agreement on the payment by Zurich US of contingent compensation on: i) all excess casualty policies through 2008; and ii) other lines of insurance (or products/segments) and, starting in 2009, excess casualty policies if insurers not paying contingent compensation on that line (or product/segment) (including to direct writers and insurers employing only captive agents for that line (or products/segments)) and insurers that have signed agreements with the New York attorney general or other state attorneys general with this restriction against paying contingent compensation for that line (or product/segment), together represent more than 65% of the national gross written premiums in that particular insurance line (or product/segment) in the calendar year for which market share data is most recently available. As noted earlier, this prohibition can be terminated if the market share falls below 60%.

In addition, Zurich US committed in the assurance agreement to support legislation and regulations in the United States to "abolish contingent compensation for insurance products or lines" and "requiring greater disclosure of compensation." If legislation and/or regulations are enacted that abolish the right of carriers to choose to pay incentive compensation to agents and brokers or that prescribe compensation disclosure requirements, the impact on agents and brokers could be substantial, from both an economic and work flow perspective.

Incentive compensation is a legal and effective means of compensating sales professionals in every industry. Its use is widespread, with varying structures that account for profitability and productivity. From refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice. In the insurance industry, an agent or broker must invest substantial time to identify the insurance consumer’s wants and needs; understand the complex terms of policies available; assess the products available to seek and present choices about coverage, price, service and financial strength of carriers; and remain available to assist with questions and changes as needed. IIABA believes that the compensation structure, including contingent commission, is not the real problem—the problem is the alleged illegal activity to obtain that compensation, and IIABA supports the prosecution of such illegal activities.

Also, if there are conflicting legal and/or regulatory requirements from different states, the efficient work flows and business operations of insurance agencies and brokerage firms would be disrupted, adding time and cost to the placement of insurance.

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

IIABA will update you on significant developments regarding this matter.

Debra Perkins (debra.perkings@iiaba.net) is Big "I" executive vice president and general counsel.

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
State of Florida Sues Marsh for Bid Rigging and RICO Violations

On March 14, 2006, the state of Florida sued Marsh & McLennan Companies, Inc. (Marsh) in state court for alleged abuse by Marsh of placement service agreements (PSAs) rather than participate in the settlement reached in the litigation filed on Oct. 14, 2004 by New York Attorney General Eliot Spitzer involving PSAs. The New York lawsuit was settled in January 2005, with Marsh agreeing to pay $850 million in damages to certain policy holders in addition to agreeing not to accept contingent commissions in the future.

The settlement in New York was designed to resolve disputes involving PSAs with Marsh in every state Marsh did business in that wanted to participate in it. Thirty-three states have agreed to it. To date, only Connecticut and Florida have sued Marsh directly instead of signing on to the New York settlement. The remaining states have not taken any reported action on this matter.

Florida’s complaint alleges bid rigging and steering by Marsh when serving as a broker for private Florida businesses, such as Burger King, and Florida governmental entities, such as Miami-Dade County, Jacksonville Electric Authority and even the Florida Department of Insurance. The complaint by Florida is unique in that Florida is alleging that Marsh’s bid rigging and abuse of PSAs violates Florida’s state Racketeering Influenced and Corrupt Organization Act (RICO) statute. The alleged RICO violations are based on a pattern of theft against the state of Florida and Florida insureds, and a pattern of mail and wire fraud since the purported improper invoices and payments of those invoices were sent via the U.S. mail and wire transfer. The complaint also alleges violations of the state’s antitrust statute with respect to the purported bid rigging and steering based on the type of conduct alleged in the New York and Connecticut complaints. Unlike the New York complaint, the acts outlined in the Florida complaint only concern Florida businesses and government entities rather than transactions in various states.

Florida’s RICO statutes allows for restitution of three times the amount of damages proven, and the Florida antitrust statute also allows for three times the amount of damages in addition to fines of up to $1 million per violation. A press release from the Florida attorney general estimates that Marsh brokered approximately 15,000 insurance contracts in Florida from 1998 to 2004.

Now that the lawsuit has been filed, Marsh can file a response or attempt to settle the matter. To read a full copy of the Florida complaint, go to the Legal Advocacy page of www.independentagent.com.

For more information, contact IIABA Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.

P & C   T R E N D S
Company No. 33 Joins Trusted Choice^®

Hartford Steam Boiler Inspection and Insurance Company, a leading specialty insurer and reinsurer based in Hartford, Conn., is the 33rd agency system company to join the growing Trusted Choice® consumer brand movement.

"We are thrilled to welcome Hartford Steam Boiler to the Trusted Choice® movement," says Ronald A. Smith, CPCU, brand program board chairman and president of Smith, Sawyer & Smith, Inc., a Rochester, Ind.-based Trusted Choice® agency. "Hartford Steam Boiler’s commitment to independent agents always has been strong. By joining Trusted Choice® the company is reinforcing its commitment to its agency partners."

Hartford Steam Boiler Inspection and Insurance Company is one of the world’s leading specialty insurers and reinsurers, specializing in equipment breakdown insurance products, other specialty insurance and reinsurance products and inspection service and engineering consulting. The company serves businesses, industries and institutions worldwide. Founded in 1866 as "the first company in America devoted primarily to industrial safety," Hartford Steam Boiler uses its engineering knowledge and expertise to understand the causes of loss and recommend risk-management and loss-prevention solutions. For more information, go to www.hsb.com.

"Hartford Steam Boiler understands the importance and power of a recognizable and trusted brand in today’s marketplace," says Big "I" CEO Robert A. Rusbuldt. "We are moving forward every day to build the Trusted Choice® brand for both independent agencies and companies."

Launched in 2001 by the Big "I" and several agency companies, Trusted Choice® has grown into a nationwide brand movement. Today, nearly 5,500 independent agencies and brokerage firms throughout the country are participating in the program. They are joined by Hartford Steam Boiler and 32 other leading insurance companies.

The national brand identity educates consumers about the benefits—choice of companies, customized policies and advocacy support—of using independent insurance agents and brokers for their insurance needs.

Jeff Myers (jeff.myers@iiaba.net) is the executive director of Trusted Choice®.

L & H   T R E N D S
Meet Retirees’ Health Care Costs

The need for Americans to save for retirement is garnering a lot of press lately. The problem is that many people lack a fundamental understanding of what retirement means and the needs that go along with it.

To most people, retirement means that someone is no longer working and consequently not earning a regular paycheck. For others, it means they are working but doing something they enjoy without the hectic pace of their previous occupation. For example, think of all the agency owners who still come into the office for a few hours a day to help out but have turned the management reins over to someone else.

One of the most vexing retirement (or "downshifting," which means having a less stressful job) issues isn’t necessarily a decrease in income, but rather losing employer-provided benefits.

Many companies have reduced or eliminated their retiree medical insurance programs. Many individuals who hope to retire at an earlier age are stymied when they find out what it costs to pay for health insurance on their own until they are eligible for Medicare benefits. A person retiring at age 62 can opt to receive reduced Social Security benefits. However, Medicare is not available until age 65. And even when Medicare is available, the cost of paying for a Medicare Supplement insurance plan and out-of-pocket medical expenses is substantial.

A recent Fidelity Investments study attempts to estimate the average cost for a couple who retires at age 65 without employer-sponsored retiree health insurance. The study concludes that the couple needs to set aside at least $200,000 to meet their future health care needs. This estimate didn’t include costs for dental expenses, over-the-counter drugs and long-term care.

Typically, people save for retirement through their employer’s 401(k) plan and/or by contributing to their own IRAs. While this is important, monies withdrawn from these accounts are subject to income taxes and, unless a person experiences significant medical expenses, they will not be able to deduct the medical expenses by itemizing them on their return (or if they can, only in excess of 7.5% of adjusted gross income).

Is there a more efficient way to save for retiree medical expenses? Yes, by using a health savings account (HSAs). An HSA is basically a high deductible health insurance plan that allows participants to contribute on a pre-tax basis ($2,700 for individuals, $5,450 for families and an extra $700 if someone is age 55 or older) and accumulate the unused balance to pay for future medical expenses including retiree medical expenses. The advantage to this approach is threefold: 1.) The contributions are not included in income (i.e. tax free); 2.) any investment earnings grow tax-free and 3.) distributions are not taxed when used to pay for eligible medical expenses.

This is a "win-win-win" situation. Most insurance companies offer HSA options, and independent agents can offer HSAs as an option to customers who are concerned about paying for retiree health expenses. Small business owners are a good target audience for HSAs.

Independent agents should also consider HSAs for their agency health insurance plans. It’s never too late to start saving for retirement and HSAs are a viable tool to help.

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

 V I E W :   A G E N C Y   M A N A G E M E N T
Sweet 16, Elite 8 or Final 4—What Makes the Difference?

I’ve been watching lots of basketball lately, as I’m sure many of you have. As I watch and learn more about what makes a good team great, I can’t help but parlay the teamwork used in basketball into our world of insurance marketing and sales.

Teams that win and advance share a few key characteristics that independent agents can use to advance agency sales results:

· Spreading the Floor: Truly good offenses seem to have a sixth sense about them in that each team member knows where the others will be. Passes are made into what appears to be thin air, but then a player shows up to receive the ball. In our agencies, do we foster that confident, sixth-sense teamwork when it comes to passing a marketing lead to the sales staff for follow up?

· Finding the Open Shot: You can find opportunity everywhere---if you’re looking for it. We see this in basketball all the time. Whether it’s an aggressive steal resulting in a fast break finished with a slam dunk, or more deliberate passing that catches a defense off guard, the opportunity to take the shot eventually appears. Is our agency marketing, sales and service staff trained to watch for scoring opportunities?

· Rebounding: Following the shot and never giving up are huge lessons in basketball. The same should hold true for our business. Do we follow up on every proposal, quote and referral? Do we continue this "rebounding effort" until we either "score" or the ball is taken away?

· Use of the Shot Clock: Timing is critical in basketball and in sales. Do we always have one eye on the clock to be sure we’re making the best use of the time we have? Taking our shot before the foul is called? This means developing a consistent and timely approach to prospecting, proposal development, renewals and referrals. Don’t miss the shot opportunity because you lost track of the shot clock.

· Overall Conditioning: Teams that consistently win are in great shape, physically and mentally. Team members support one another and help each other work on their weaknesses. Does the management philosophy in your organization help producers and agency support stay motivated to play hard, as a team, every game?

· Learning from a Loss: Championship teams face defeat from time to time. What keeps them champions is that they use the loss as a learning lesson. What didn’t go right? What should we have done better? Where did the teamwork breakdown? They answer these questions to regain confidence for their next outing.

An amateur competes with everyone. A professional only competes with themselves. Stay prepared and compete like the professional independent agents are!

Kitty Ambers (www.aimssociety.com) is the executive director of the American Insurance Marketing and Sales Society.