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 Big “I” National News

P&C Trends
A Different Kind of Recession
Current economy’s impact on p-c industry is unique.

The property-casualty insurance industry is often considered uncorrelated to cycles in the larger economy due to a constant demand for insurance; however, the current recession is an outlier, according to a recent report from Advisen.

According to Advisen’s report, “The Impact of the Economic Crisis on the P-C Industry,” the current recession differs from previous downturns in both its depth and broad scope. These factors are reflected in the surprising decline of industry-wide net written premiums (NWP) for both 2007 and 2008 --- a phenomenon not seen since 1943.

“We usually analyze net written premium on a growth basis and don’t usually see it adjusted for inflation,” says John Molka, a senior industry analyst and editor at Advisen who researched and wrote the report. “The general thinking is that demand for insurance doesn’t fluctuate a lot, but the story is told more clearly when rates are adjusted for inflation.”

The story for 2007 and 2008 is a grim one: industry-wide NWP dropped a near-unheard of 1% in 2007 and an additional 0.4% in 2008, according to Advisen. In addition, industry-wide net income has fallen by $60.6 billion since 2006, with a return on average surplus of 1.1%, down from 12% in 2006.

Independent agents are seeing customers reacting in unprecedented ways, across coverage types. Carrie Johnson, president of Carrie Johnson Insurance Agency in Myrtle Beach, S.C., says sales of homeowners, secondary dwelling, workers compensation, small business and general liability coverages have all declined at her agency due to fewer jobs and homeowners in her area.

“We’ve noticed more people struggling to pay premiums and lapses in coverage,” she says. “One or two policyholders have canceled their homeowners because they lost their homes, and a lot of the general liability policies I wrote last year didn’t renew because the policyholders are out of work.”

Johnson has also noticed that customers are cutting corners and making adjustments to save as much money as possible when coverage is required. For example, employers are paying worker’s compensation costs out-of-pocket to avoid making claims that would result in premium hikes, and many customers are trying to cut their homeowners insurance costs in any way possible.

Johnson’s experiences are on par with Advisen’s findings on the unforeseen impact diverse sectors of the economy are having on the insurance industry. Exposure bases such as payroll, property values, sales and square feet of retail are shrinking along with companies’ sales and wages. There are fewer vehicles to insure, including truck fleets, which have decreased from 369,000 units in 2006 to just 200,000 in 2008. The number of housing unit starts has also declined dramatically, from 2.1 million in 2005 to 550,000 in December 2008. And as homeowners disappear and businesses close their doors, there is simply less demand for insurance.

Bob Padula has certainly taken notice of this recession’s effect on multiple industries, including real estate. When his agency got a price quote to install a sprinkler system three years ago, the price was twice what it cost him when he finally got around to installing the system this year.

“One thing in this environment I’ve never seen before is reduction of replacement values on real properties,” says Padula, CEO of Gencorp Insurance Group in Greenwich, RI. “For the first time, materials and labor rates are less expensive than 24 months ago, and we haven’t seen this pressure on real estate replacement costs before.”

Advisen confirms Padula’s observation, citing the devastating effect declining property values have had on the construction industry and, in turn, on its general and excess/umbrella liability coverage.

Yet the news isn’t all bad. According to Advisen, the p-c market is expected to eventually harden and competition will decrease.

“(We project) that a hard market could begin to set in as early as mid-2009, and no later than 2010,” the report says. “The hard market will likely take off slowly due to an absence of confidence by businesses and consumers alike. When the market does harden, however, it could extend longer than previous hard markets owing to the lack of new capital entering the market.”

Molka adds, “Eventually, the companies that have particular expertise in whatever line they’re writing will be the ones surviving in those lines. Companies writing coverages by the time the hard market comes will enjoy more sustained hard market than in recent past.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.


 

P&C Trends
Marsh & McLennan Makes E&O News Again
MMC seeks to limit liability via client service agreement.

Industry reports indicate that in March, insurance industry mega-broker Marsh & McLennan began asking clients to sign a client service agreement which limits the Marsh exposure to professional liability claims of $10 million. Deploying a technique known in risk manager circles as “non-insurance, contractual risk transfer,” Marsh is reportedly seeking to match their exposure to liability more closely with the fees they charge for services. Predictions are mixed on whether the approach will be successful, but the motivation for limiting insurance agency/brokerage professional liability is clear, as about one in five independent agents learn each year.

Business Insurance reports a key driver in the decision is a pending $1.8 billion lawsuit against the Marsh employee benefits consulting subsidiary, Mercer. That suit was filed by Alaska Gov. Sarah Palin in late 2007 based on alleged Mercer mistakes in calculating the state pension plan’s expected liabilities, including future health care costs. However, human resources consulting is not the only sector that brings with it a risk of liability claims. The graph below from the Nov. 21, 2008 Insurance News & Views highlights Marsh’s increasing reserves for a professional liability claim, along with a list of other typical liability claims tracked by the Big “I” Professional Liability Committee (PLC).
 

*Source: Big “I” Professional Liability, MMC SEC Reports and Business Insurance

In an informal poll of members of the PLC and a Fortune 500 risk manager, predications of Marsh’s success in this effort were negative. It was universally stated that if the other larger brokers do not follow suit, it will be difficult or impossible for Marsh to implement new client services agreements and remain unchanged. Insights were shared over possible legal challenges in implementing the agreements, noting state statues sometimes limit such exculpatory approaches in contracts for public policy reasons. It was noted that even agents writing business at levels below the Fortune 500 marketplace see liability awards that exceed a $10 million limit.

Perhaps the most poignant observation was whether and how well the new small business- focused Marsh & McLennan Agency, LLC will implement such agreements. The operation was formed in November 2008 to serve small and emerging U.S. companies. While interest in any viable E&O risk management technique bears careful assessment, PLC members seemed unanimous in the belief that it would be years before Big “I” members would follow suit with such a liability limitation. Only time will tell, but members should be assured that the PLC and its loss control working group will be monitoring developments closely.

For more information on the Big “I” Agency E&O program, including how to contact your state association representative, visit www.iiaba.net/eo.

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^SM and a licensed p-c agent.


 

Legal Advocacy
New Rules for Red Flag and COBRA
Stay informed about the latest developments.

Red Flag Rule

The Identity Theft Red Flag Rule became effective Jan. 1, 2008, with mandatory compliance beginning on May 1 following a six-month delay in enforcement. The Federal Trade Commission (FTC) explained the basis for the delay as being “that some industries and entities within the FTC’s jurisdiction have expressed confusion and uncertainty about their coverage under the rule.” The FTC indicated that during the six-month delay period, it planned to engage in outreach and provide education about the application of the rule, and on April 2 the FTC unveiled a new Web site about the rule. The Web site does not appear to include information that alters any of the guidance previously provided to Big “I” members. A summary of the rule is included in a memo entitled, “Overview of the Fair Credit reporting Act, the Fair and Accurate Credit transactions Act and the Drivers Privacy Protection Act” starting on page 10 at letter G. That summary is available to members by logging on to www.independentagent.com and selecting “Legal Advocacy” under “Memoranda and FAQs.”
 
COBRA Rules Under the American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 includes provisions for premium reductions and additional elections on health benefits under COBRA. The U.S. Department of Labor published a fact sheet summarizing the changes to COBRA under the act, available by clicking here. Further information on the new requirements is available on the U.S. Department of Labor here and on tax issues concerning the changes here. 

Debra Perkins (debra.perkins@iiaba.net) is Big “I” vice president and general counsel.


On the Hill
Sen. Tester to Address the Big “I” Legislative Conference
Montana democrat supports state regulation of insurance.

U.S. Sen. Jon Tester (D-Mont.) will address the Big “I”  on April 30 during the Big “I” Legislative Conference & Convention in Washington, D.C.

Tester will be a featured speaker during the National Legislative Conference Breakfast, just prior to attendees heading out for the annual Big “I” Day on Capitol Hill where more than 1,000 agents will lobby members of the House, Senate and their staffs on issues that directly impact independent agents and consumers.

Tester understands the importance of state regulation of insurance and has been hailed for his commitment to small businesses, state’s rights and fixing the economy.

The Montana Democrat serves on the Senate Banking, Housing and Urban Affairs Committee, which has jurisdiction over insurance issues. Additionally, he serves on the powerful Appropriations Committee. Tester was elected to the U.S. Senate in 2006 after a long history of public service in the Big Sky State, which included service in the state legislature and local boards. Tester is also a farmer, former music teacher and small businessperson.

The Big “I” Legislative Conference & Convention is the insurance industry’s best-attended, most effective legislative meeting. This year’s event will take place April 29 through May 1 at the Marriott Wardman Park Hotel in Washington, D.C.

The legislative conference is an opportunity for Big “I” agents and brokers to discuss important issues with their congressional representatives. Top issues this year include: insurance regulatory reform, agent licensing reform, health insurance reform, taxes, natural disaster issues and other challenges and opportunities facing the independent agency system.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.


L&H Trends
Navigating a New Budget
Help business owners choose the right employee benefit plans.

President Obama's fiscal year 2010 proposed budget has a number of objectives related to turning around the economy in the near term. Given the number of ambitious goals, there will enormous deficits based on estimates from the Congressional Budget Office. To mitigate the size of the deficit, the president has indicated he will increase taxes on families with incomes of more than $250,000. Whether taxes will increase for people with incomes below this threshold has been a subject of intense debate. In the outline of the president's budget on the Office of Management and Budget Web site, there is a discussion of a number of the administration's objectives and the tax measures being proposed. One particular item deals with reducing itemized deductions for families with incomes of more than $250,000. The budget document reads:
 
"Lowering health care costs and expanding health insurance coverage will require additional revenue. In the health reform policy discussions that have taken place over the past few years, a wide range of revenue options have been discussed—and these options are all worthy of serious discussion as the Administration works with the Congress to enact health care reform. The Administration’s Budget includes a proposal to limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent— and the initial reserve fund would be funded in part through this provision. This provision would raise $318 billion over 10 years."
 
For independent insurance agents, this provision, if enacted, will impact families by limiting the value of their itemized deductions. Since many business owners could be adversely impacted, retirement and employee benefit plans will generate more interest like they did during the 1970s due to high marginal income tax rates. This is because contributions to qualified pension plans such as 401(k)s, profit sharing plans and other employee benefits plans are deductible as ordinary business expenses. Depending on the type of retirement/employment plan selected, the organization’s payroll taxes may also be lowered. Many business owners use forms of business entities such as sole proprietorship, limited liability corporation, S corporation, and partnership to pass along the bottom line income of the business to their owners/partners. 
 
In addition to retirement plans, there are a number of employee benefit plans such as health insurance, long-term disability, group term life insurance (up to the first $50,000 of coverage), long-term care, flexible spending accounts and health savings accounts that should be discussed with clients to determine whether they meet their needs. April is a perfect time to devise a systematic communication campaign to let customers know you can assist them with their benefits programs. Quite often, independent agents’ commercial customers do not realize that the agency can assist them in these areas. Also, reaching out and letting accountants and attorneys know the agency can be a resource to them to solve their members' benefits needs is another important companion effort. With a third of 2009 behind us, now is the time to discuss the reality of the budget deficits with clients.

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