T H U R S D A Y ,  A P R I L   1 2 ,  2 0 0 7 

Big “I” National News

P&C Trends

Industry Satisfaction Remains Above-Average
Index shows no change in customers’ satisfaction with industry.

Customers’ satisfaction with the p-c insurance industry remained unchanged in the past year, but is still above average in comparison to other industries, according to the American Customer Satisfaction Index (ACSI).

In fourth quarter 2006, the ACSI, a 100-point scale designed to gauge American customers’ satisfaction with goods and services, rose to a new record high of 74.9---an improvement of 0.7% over the previous quarter and a 2% increase from 2005.

“With falling oil prices, rising wages, a record-low savings rate, little inflation, high consumer confidence, stable interest rates, low unemployment and now also the highest customer satisfaction level ever recorded by ACSI, it is not surprising that consumer spending is unusually strong and has helped lift the overall economy,” says the ACSI report.

The ACSI, conducted annually by the University of Michigan, measures 13 industries and found nine of them showed improvements, two had declining scores and two remained unchanged in 2006. The p-c industry was one of two that saw no change last year (e-commerce auctions, such as eBay, was the other); however, the industry’s lack of progress isn’t necessarily a bad thing since its satisfaction index remained at 78, above the 74.9 average.

“It is not uncommon for little change to be experienced in an industry from one year to the next. If there are no big changes in value (prices/fees/premiums) good or bad and no service initiatives, then there is unlikely to be a measurable change,” says David VanAmburg, managing director of the American Customer Satisfaction Index. “P-c insurance has actually been very stable for the past five years, varying only between 77 and 78. It has been one of the more stable industries in ACSI over the years, and one of the higher performing service industries. This is probably the result of insurers doing a good job of marketing to expectations, in other words, customers know very well what to expect from p-c insurance and insurers do a good job of matching those expectations year after year.”

The index also includes the life and health insurance industries, which showed the greatest increase among the improved industries in 2006 up 5.3% and 5.9% respectively from 2005. The report attributes the gains to improvements in quality and value.

“On a pricing front, although health care costs continue to climb, both health insurance premiums and drug costs grew at a slower pace in 2006,” the report says. “The industry-wide improvement is the result of increase competition and longer life expectancies. Customers are also increasingly moving away from more expensive permanent to less costly term life insurance polices.”

The ACSI does not directly address customers’ satisfaction with independent agents when conducting the index; however they do play a considerable role in the p-c, life and health insurance industries’ ratings, according to VanAmburg.

“They are certainly part of the index. ACSI screens customers who have p-c insurance, life insurance and so on, and asks with whom they have their policies. They will either name one of the big companies or any other company or an agent/broker with whom they have policies,” he says. “The ACSI score for p-c is a reflection of satisfaction with the entire industry, from the largest group policies offered through employers to the smallest of independent agents.”

Despite the historical trend of a recession following a short-term spending hike, such as the one in the fourth quarter 2006, the ACSI is forecasted to grow by 3.5% to 4.1% in 2007 and growth is expected to continue as long as consumers continue to spend.

“Even though customer satisfaction went up in 2005 as well, its rate of growth was more timid and consumer spending growth was weak. Spending picked up by mid-2006 only to fall back again before its rise at the end of the year,” the report says. “Looking at the total picture, the imbalances in the economy remain, but as far as the short-term outlook is concerned, the hope is for a soft landing for the economy is beginning to look less likely. Without a significant reduction in consumer spending, it seems more probable that there won’t be any landing at all."

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

Producer Compensation Issue Update

Contingent Commission Class Action Loses Steam

On April 5, a New Jersey federal trial court judge dismissed some of the major claims against more than 100 insurers and brokers in multi-district litigation involving alleged misconduct relating to the use of contingent commissions. This class action followed the New York attorney general’s investigation of alleged bid-rigging and steering through the use of contingent commissions and consolidated lawsuits pending in a number of states.

Judge Garrett Brown dismissed the federal antitrust conspiracy claims and the racketeering (RICO) claims because the plaintiffs’ failed to allege facts to support violations of the law on those issues. The judge has given the plaintiffs 30 days to re-file their claims with the specificity required.

In dismissing the antitrust claims, the judge found the facts and evidence not sufficiently specific to show that the use of contingent commission agreements was anticompetitive. Similarly, in dismissing the RICO claims, the judge found that the evidence presented was not sufficient for the claim to proceed.

This is the second time this court has determined that the plaintiffs have not presented facts or evidence with the specificity required by law for federal antitrust and RICO claims; the first time was in October 2006. In its most recent opinion, the court stated that this opportunity to re-file in the next 30 days would be the plaintiffs’ last chance on these issues.

The order dismissing the claims does not dismiss the entire class action. It dismisses only the federal antitrust and RICO claims against certain defendants. It did not dismiss the claims of state law antitrust violations, breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties and unjust enrichment. It also appears that the antitrust conspiracy claims were not dismissed as to the conspiracies alleged to have been led by Marsh and Willis.

For more information about producer compensation issues, please log in as a member to www.independentagent.com, go to Legal Advocacy and select IIABA/Industry Information and News, or contact Kathleen Graber, associate general counsel, at 703- 706-5432; kathleen.graber@iiaba.net.

Producer Compensation Issue Update

Ohio Continues Investigation of Marsh

As IN&V reported last month, Ohio Attorney General Marc Dann has been continuing his investigation into Marsh & McLennan regarding bid rigging and steering through the use of contingent commissions. Last week, Marsh agreed to produce 614 boxes of documents in response to a subpoena issued by the Ohio AG. The subpoena was originally served on Marsh in October 2004, and seeks Marsh Global Brokering placement files for certain Ohio businesses and an individual for the time period from Jan. 1, 2001 through Dec. 31, 2004.

The continued investigation keeps Marsh in the spotlight regarding contingent commissions, and Ohio’s efforts to enforce a subpoena that is about 2.5 years old shows that the investigations have not ended. Ohio has negotiated separate settlements in the past instead of signing onto multi-state settlements, such as was done with Zurich after Zurich had entered into a multi-state agreement with numerous other states.

For more information about producer compensation issues, please log in as a member to www.independentagent.com, go to Legal Advocacy and select IIABA/Industry Information and News, or contact Kathleen Graber, associate general counsel, at703-706-5432; kathleen.graber@iiaba.net.




Producer Compensation Issue Update

Former Marsh Executives on Trial

The trial for two former Marsh & McLennan executives began this week in Manhattan’s state Supreme Court where the pair faces charges of alleged bid rigging.

William Gilman, the company’s former executive marketing director, and Edward McNenney, the former global placement director for Marsh, were indicted in September 2005 on felony charges of scheme to defraud, restraint of trade and competition and grand larceny in the first and second degree. The two are accused of conspiring with brokers and other insurers to rig bids for the company’s corporate customers from November 1998 to September 2004.

According to the indictment, the defendants and other Marsh employees told their excess casualty clients that they obtained bids from insurance companies in a competitive bidding process when they actually rigged the process by pre-determining which companies would win the business, setting a target for the bid-winner to submit as a bid and obtaining losing bids from participating insurance companies. In doing so, the accused fraudulently accrued millions of dollars in commissions and fee for Marsh as well as millions in premiums for the insurance companies.

The two former executives have pleaded not guilty to the charges and are being tried without a jury before Justice James Yates. If convicted, Gilman and McNenney could face a maximum sentence of 25 years in prison.

In January 2005, Marsh & McLennan agreed to pay $850 million in restitution to settle charges of client steering and bid-rigging brought on by former New York Attorney General Eliot Spitzer.

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

L&H Trends

Changes for Registered Representative of Broker-Dealers
Representatives will be held to the same standards as investment advisers.

Approximately 20% of all independent insurance agencies have at least one individual who is a registered representative of a broker-dealer. For most independent insurance agencies, these agents become registered in order to sell variable life insurance and variable annuities, which require a securities license because some of the investment options involve stocks. Most of these representatives do not facilitate individual security sales of stocks or bonds, which requires additional licensing. Most of these individuals are essentially life insurance agents who want to offer a full compliment of life insurance products---traditional life insurance, universal life insurance and variable life insurance---to their customers. They make their living by solving consumers’ needs to protect their families and/or businesses and also provide some retirement income.

There is also the financial planning constituency that charges a fee for their services and does not offer products per se, although some offer no-load or low-load life insurance and assess a fee for assets under management as their compensation. There is also variation of the fee where instead of charging a fee on assets under management, financial planners charge a flat hourly rate for their services like an accountant or attorney. Which approach is optimal? A case can be made for all three based on the client’s situation. Middle-class wage earners are most likely not going to be receptive to paying an hourly rate for financial advice. High net worth individuals may be more comfortable paying an hourly rate like they do for their other advisors. One approach won’t fit everyone’s needs.

A recent decision by a federal appeals court concludes a lawsuit filed by the Financial Planning Association against the SEC in July 2004. The association challenged an SEC rule exempting certain broker-dealers from the fiduciary requirements of the Investment Advisers Act of 1940 that was first proposed by the SEC in 1999.

According to the FPA Web site, the FPA’s attorneys successfully argued in court that the SEC cannot rewrite the protections Congress adopted in a way that would have allowed brokers to offer the same advisory services as registered investment advisers without requiring brokers to put their client’s interests first. The SEC could chose to appeal this decision to the Supreme Court but may chose not to. Essentially, this means that registered representatives of a broker-dealer will be held to the same fiduciary standards that registered investment advisers are held to. It also means that investment recommendations and product decisions will have to accommodate this higher standard, which can be problematic for representatives that tend to use the proprietary products of their firm. Previously, under the so-called “Merrill rule,” the “wire-house” reps were exempt from the fiduciary requirements that applied to registered investment advisors.

Independent insurance agents that sell security products through a broker-dealer will undoubtedly receive additional compliance information as the SEC promulgates the requirements (unless it decides to appeal the decision). This may necessitate different sales practices and disclosures to the consumer. Stay tuned as there will no doubt be more to come during 2007 on this issue.

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

Agency Management

Lacking in the Sales Department
Survey gauges companies’ sales and recruitment practices.

Salespeople are one of their most valuable commodities, but many companies are not investing much in recruiting, hiring and training, according to a survey conducted by DePaul University’s Sales Leadership Program.

This is the first time the program conducted the survey, which polled a variety of companies from across the United States on their management and sales trends. The study surveyed 3,000 randomly selected companies, including 46 financial/insurance institutions, on the following key areas: recruiting techniques; selection, hiring and training methods; and motivation and compensation methods.

Recruiting Techniques
The survey found that, on average, companies recruit 34 sales personnel each year and 74% of companies choose their new-hires from a pool of college graduates and those with advanced degrees. Most companies (51%) also said they require job candidates to have some degree of sales education whether it’s through a sales course or a degree. The survey also includes the following key recruiting techniques findings:

• Friend and employee referrals still dominate selection.
• Firms continue to use subjective measures to hire employee ---50% spend three hours or less on the interview process.
• Firms spend little time or personnel on interview process.
• Firms still seeking personality-driven traits and measures.
• Most firms do not know their COH (cost of hire) and only 30% of those surveyed provided an estimated COH.

Selection, Hiring and Training
Formal training processes seem to be lacking among the average company as only 43% of respondents reported having such a process in place. Companies that do offer a training program are focusing mainly on market, product, customer and company information and offer little training in selling skills, territory management or use of technology, according to the survey.

“Additionally, while some focus is placed on communication skills, customer focus and the selling process in terms of skills and knowledge, little is placed on more consultative, solution-selling areas such as critical thinking, consultative selling (except in large firms), strategic planning, business acumen and organization acumen,” DePaul’s report says.

While companies may be deficient in the training department, the survey found they are still investing money in their new-hires at an average of $26,000 per person.

Motivation and Compensation
The majority of firms (56% ) reported using a base salary plus commission to compensate their employees; however, the compensation system was varied by the type of business and financial/insurance firms were found to prefer straight commission programs. The survey also found that most firms (76%) offer special bonus programs, while larger firms with more money and resources tend to provide prizes, merchandise, premiums and trips as additional incentives. 

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