..:: Insurance News & Views ::..

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 Still Feels Heat,
But Likely to Avoid Criminal Charges

Just when American International Group Inc. seemed to be the topic of every report, speculation and whisper, an unlikely figure emerged to put nervous investors at ease: New York Attorney General Elliot Spitzer.

Spitzer issued a three-sentence statement Monday that said AIG’s board and new management are cooperating with his investigation into "certain" transactions. "Based upon these efforts, and based upon our knowledge to date, we believe that a civil resolution with the corporation will ultimately be achievable," Spitzer wrote.

According to the Wall Street Journal sources, Spitzer issued the statement at the request of an AIG representative who asked him to "reiterate past statements praising the cooperation of current management and the likelihood of an eventual civil settlement," the article says. "Avoiding a criminal indictment is key, because no major financial company has survived criminal charges in the history of U.S. financial markets."

AIG had reason to be concerned about investors’ perceptions of the investigation. Shares are down 26% since the company announced its subpoenas over accounting matters, according to the WSJ. After Spitzer’s statement, shares were up 4.6% on Tuesday to $53.30.

AIG’s new CEO Martin J. Sullivan issued a letter on April 3 to shareholders also meant to quell their worries. In the letter, Sullivan also emphasized that AIG is cooperating with regulators. Additionally, he addressed a widely reported, recent incident where boxes of documents were taken from a Bermuda AIG building. Sullivan said that they were removed "without AIG’s permission," and that "AIG immediately brought these incidents to the attention of the relevant authorities."

According to WSJ sources, "About 80 boxes of documents were removed but eventually recovered." Attorneys of former CEO Maurice "Hank" Greenberg had removed them from the building, and Spitzer "had threatened to indict the company over the fracas," says the WSJ.

AIG isn’t in the clear yet though. Although Spitzer’s statement acknowledges that the company will likely avoid criminal charges, it remains the center of increasingly complex regulatory investigations.

The WSJ reports that several regulators are "examining potentially questionable AIG accounting maneuvers" and "have found more questionable moves made over the past decade that the company hasn’t yet disclosed, according to people close to the investigation."

One area the investigations are focusing on concerns the potential conflict of interest between AIG and the private entities Starr International Co. and C.V. Starr. Last weekend, owners of Starr International, which controls 12% of AIG shares, booted "at least seven AIG executives from its board, including Sullivan," according to the WSJ.

"The most-immediate potential conflict is that AIG executives continue to rely on Greenberg, who is chairman of Starr International, for a big portion of their pay, even after Greenberg has been pushed from the firm," says an Associated Press article.

According to the WSJ, Starr International owners did not tell Spitzer and other regulators about the move, "and they were immediately suspicious and planned to examine the action."

Standard & Poor’s lowered AIG’s long-term counterparty credit and senior debt ratings to "AA+" from "AAA" and its preferred stock rating from "AA" to "AA-."

"The number and scope of inappropriate financial transactions—some characteristic of aggressive financial management—have diminished our assessment of management and its internal controls, corporate governance and aggressive culture," says S&P credit analyst Grace Osborne. "In addition, the potential breadth of management involvement in these transactions raises broader enterprise risk-management concerns."

Senate Judiciary Chairman Arlen Specter (R-Pa.) reportedly may introduce revised asbestos legislation as soon as this week after working through a two-week recess to make the bill more acceptable to members of his own party. Specter reportedly has made "explicit promises" to introduce a bill that is acceptable to the committee’s Republican members, but also has said he wants to craft a bill that can ultimately win wide Democratic backing.

Reportedly, several conservative senators on the committee have been pressuring Specter to alter the bill to respond to their concerns. During the two-week recess, Sens. Sam Brownback (R-Kan.), Jon Kyl (R-Ariz.), John Cornyn (R-Texas), Jeff Sessions (R-Ala.) and Tom Coburn (R-Okla.) asked Specter for changes to a draft bill he has circulated. The suggested changes would include tightening medical criteria that determine which asbestos victims are eligible for compensation under a proposed federally administered trust fund.

Specter has not committed to any particular changes, and he reportedly is hoping that Judiciary Committee Ranking Member Patrick Leahy (D-Vt.) or committee member Sen. Dianne Feinstein (D-Calif.) will sign on to the bill in order to facilitate a working bipartisan majority large enough to overcome procedural stalling tactics. Senate Majority Leader Bill Frist (R-Tenn.) has not committed yet to a new date for a floor vote. The bill had been slated for a floor vote this week, under an agreement between Specter and Frist, when Specter advised that a bill would need to move by now or be back-burnered. But the timetable continued to slip as negotiations continued throughout recess.

Several asbestos victims-rights groups are working together to oppose the bill, saying asbestos victims will not receive fair treatment under the legislation.

The Big "I" supports reform of the claim-swamped asbestos-litigation system and appreciates Specter’s work to move a bill, but it also wants to be certain that there can be no leakage of claims back into court once a trust fund is established.

"It is very important that the funding proposal be fair and explicitly stated, so that insurers do not risk being on the hook for more money than was envisioned all along," says Charles E. Symington Jr., Big "I" senior vice president of government affairs and federal relations. "We also believe policymakers should not require insurers to pay vast sums into a trust fund that may not provide a final resolution to the problem."

Reportedly, a number of prominent insurers, including Liberty Mutual, Nationwide, Allstate, the Chubb Corp. and 11 others, have told Specter that problems with asbestos legislation can not be fixed and urged him to pull the bill entirely. In a letter, the insurers noted that business and labor stakeholders negotiating a bill have been unable to agree on details of the proposed $140 billion victims’ trust fund.

In last week’s Insurance News & Views, Big "I" members were encouraged to become activist voices in their communities for meaningful tort reform. As messengers of the insurance price tag for what many view as a too-litigious society, agents make effective advocates for meaningful and sensible changes to our legal system. Let’s look at one state’s successful reform effort for guidance:

Recently, U.S. Chamber of Commerce President and CEO Thomas J. Donohue singled out the efforts of Mississippi and applauded them for "doing the right thing." The American Insurance Association commends the Mississippi reforms as a "major accomplishment." The day Gov. Haley Barbour achieved what some thought impossible that, the National Federation of Independent Business said, "Today…the Legislature stood tall…balancing the scales of justice for all the people…"

So what happened in Mississippi? First, the state’s citizens elected Barbour, a Republican with a stated commitment to change the state’s legal climate, as governor. Additionally, the state saw the defeat of an 11-year incumbent Supreme Court justice who was once the president of the Mississippi Trial Lawyers Association. Among the resulting legislative changes to the Mississippi judicial system:

1. Eliminated joint liability

2. Capped pain & suffering

3. Limited punitive damages

4. Instituted "Innocent Seller" protections

5. Reformed premises liability (limits independent contractors or employees suing property owners)

6. Reformed venue-joinder (making it harder to pick a favorable plaintiffs jurisdiction)

For more details, click here to access a summary written for the Independent Insurance Agents of Mississippi (IIAM).

Mississippians are now looking forward to a much friendlier business climate and the jobs and opportunities that come with it. Governor Barbour has started talking to business about the advantages of locating in Mississippi. As was noted in last week’s IN&V, 96% of the corporate attorneys that participated in the U.S. Chamber Institution for Legal Reform’s tort study feel Mississippi will see positive results from the new legislation. What can be learned from Mississippi?

I spoke with IIAM Executive Vice President Clinton Graham about Mississippi’s turnaround and how agents can be effective advocates for change. The Mississippi Big "I" was integrally involved in the tort reform effort. Graham informed me that the association was a founding participant in the successful tort reform coalition, Mississippians for Economic Progress. He and his agent leadership—along with the Chamber, NFIB and other associations—aggressively lobbied their state legislature. His membership was also very effective in advocating tort reform with individual legislators.

Graham’s advice for other states? Be patient, as meaningful reform takes many years. "You have to be fully engaged on this issue," he says. "Stay committed and don’t give up. Don’t accept anything less than significant, meaningful tort reform." He noted the less-public success of round-one of tort reform in 2002 was meaningful but not enough. IIAM and the Coalition did not give up.

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

The economic picture has not been bright through 2005’s first quarter. Rising energy prices and staggering budget deficits and the resulting increase in interest rates create a picture not dissimilar to the mid-1970s.

During that difficult time period, domestic steel production was reeling from severe foreign competition. Major steel facilities were closed in western New York, Pennsylvania and Ohio. Energy costs and supplies were tight, and some supermarkets stocked horsemeat because people on fixed incomes had trouble making ends meet.

One significant difference in today’s U.S. economy is that the United States then represented a much larger share of the world Gross Domestic Production (GDP). It was also more difficult to shift production around the world, especially for sophisticated production lines. IBM dominated the technology world with its large mainframe computers. The Far East focused on auto and steel manufacturing and Japan still represented a low-cost wage environment to produce goods. Most major American companies offered their employees traditional, defined benefit pension plans (401(k) plans had not been invented) and health insurance at little-to-no cost to the employee. Deregulation was yet to hit the trucking and airline industries. And the federal government was producing significant deficits.

As we sit here in 2005, business owners and consumers alike are concerned. Our country is at war with an unconventional enemy with no immediate end in sight. The dollar is under considerable stress with China and Japan sitting on enormous amounts of U.S. currancy. If inflation starts to increase, it will put pressure on wages.

During the past several years, independent agencies have upgraded their agency management systems and used technology to improve agencies’ efficiencies. However, the largest expenses for any agency are payroll and benefits. If the hard market continues to soften in personal and commercial lines, it will reduce bottom-line profitability. The creative use of technology will have to continue to lesson the burden on CSRs and producers.

From an investment standpoint, there is always a temptation to market time the asset allocation of retirement portfolios. It is easy to become pessimistic about the stock market, and rising interest rates hurt the market value of bond portfolios. However, it is has been repeatedly demonstrated that no one individual can time the swings of the market cycles with long-term accuracy. Does this mean that investors might should review their portfolios to perhaps shorten bond maturities and make sure that their stock holdings are well diversified so that there is not an overweighting to any one sector? Of course. Some defensive repositioning can make sense in light of overall market trends. At the same point, investors tend to lag the markets by taking losses in their holdings before getting out of them and then running the risk of missing the jump in stock gains when the economy recovers.

Just like the 1970s, this is a challenging time. Stay focused, don’t panic and be ready to adapt your agency’s services to meet your customer’s needs. That is the one aspect of the economy that you have the most control over.

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
You’re Selling the Wrong Thing!
To Compete with Direct Sales, Sell Good Advice, Not Insurance

Many companies exploring alternative distribution channels believe that some people don’t want the advice and counsel of an agent. Know what? They’re right! Know something else? You’re better off letting them have those customers! In fact, the best way to "compete" with direct sales (via company Internet sites) is to stop selling "insurance."

Independent insurance agencies are a means to an end for insurance companies. They are one means for companies to distribute their insurance products. Independent insurance agencies have long been a very efficient method for distributing, or selling, insurance because this method eliminates the need for insurance companies to invest huge sums in their own distribution force, buildings, computers and, most of all, people. However, insurance companies have alternate options for distributing their products, and many alternatives are becoming more prevalent and economically feasible.

As technology improves, carriers can more easily deliver low-cost insurance directly to the consumer, and the quality added by independent agents becomes less valued by certain classes of customers. These customers do not believe the difference in the quality provided by personal service versus direct methods, such as the Internet or a 1-800 number, is big enough to justify paying a higher price. Therefore, agencies need to identify those clients who do value their services and only solicit prospects likely to buy from an agency.

Some people want minimal interaction with an agent and low-cost insurance. They believe they know enough to obviate the agent. The Internet may therefore be the best distribution method for the minimalists with some computer savvy.

Independent agents must begin focusing more on the "strong believers in insurance" and tailoring services to meet their needs. The most obvious way to accomplish this is to offer all the coverages a client needs. While agents also need to offer the best coverage to all clients for E&O purposes, this approach also makes each sale much more profitable. Currently, most producers do not even ask what coverages clients want, much less analyze their true needs. Instead, many simply get a copy of the current coverages and try to duplicate those coverages at a lower price. For the minimalist customer, this approach may work. But your best customers will not be minimalists.

The best way to compete with direct sales through the Internet is to stop selling insurance. Instead, sell advice with a product thrown in for free. After all, anyone with a license, and probably a few without, can sell insurance. Selling insurance requires no creativity because companies provide the product. Selling insurance is the easy way—not the smart way—to sell. Few people can sell good advice regarding the best way to protect assets. Few people are creative enough or willing to work hard enough. Therefore, those who can and do will have a terrific competitive advantage.

Additionally, most consumers who believe they can successfully bypass the agent are kidding themselves. Insurance is complex, with homeowners insurance alone having at least 30 million possible combinations of coverage. Most consumers do not understand enough about insurance and protecting their assets to eliminate the agent. Unfortunately, many producers act as though insurance is a simple product. They only offer what clients already have, they do not offer the best coverages and they focus on price. As a result, consumers will never know they are ignorant and they will eliminate the agent out of ignorance. If that happens, both consumers and agents will lose and we only have ourselves to blame.

Rather than selling insurance, sell knowledge, advice, experience and information, and provide more alternatives in less time. By doing so, we can beat Internet sales, we can beat 1-800 number sales and we can beat all competition. Agents are a means to an end for distributing insurance. Distinguish yourself from the competition by providing an added value to become the preferred means for distributing insurance.