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 Big “I” National News

P&C Trends
Farmers to Acquire AIG Auto Businesses
The $1.9 billion acquisition will not significantly affect agents’ current product offerings.

The Farmers Insurance Group of Companies^® recently announced it will acquire 21st Century Insurance Group, which includes the AIG Direct and Agency Auto businesses, in a $1.9 billion transaction. The acquisition is expected to be finalized in the third quarter of 2009, pending regulatory approval.

According to Farmers CEO Robert Woudstra, current Farmers independent agents will see very little change in the coverage the company currently offers, and the 21st Century brand name will remain intact after the acquisition. Farmers agents will, however, benefit from additional multi-line sales opportunities presented by current 21st Century customers.

“There is no plan at this point in time to change the Farmers product offering in any way,” says Woudstra. “The Farmers exclusive agents, as well as any independent agents currently doing business with us, will continue to offer products they have been offering.”

Woudstra adds that current Farmers agents were notified of the acquisition shortly after it was finalized.

“Both our exclusive and independent agents received written notification of the acquisition,” he says. “We are also making personal contact and conducting follow-up meetings and phone calls with the bigger agents.”

Tim Lorraine, whose agency writes with AIG Agency Auto, says he received an e-mail from AIG and a letter from Farmers explaining the acquisition, which he had been expecting for a while.

“We have known for a long time that something was going to happen and now we all know what it will be,” says Lorraine, manager of FCNB Insurance Services, Inc. in Steelville, Mo. “Nothing will change for us, except a reduction in uncertainty about how the process will unfold.  Depending on how Farmers handles it, it should be positive for agents and customers. ”

Woudstra anticipates that bringing 21st Century into the Farmers fold will allow the Los Angeles-based Farmers to expand its operations on the East Coast, where the company currently has a lesser presence than in other areas. Once the acquisition is finalized, Farmers will become the third largest overall U.S. personal lines insurer and the largest auto insurer in several states, including California.

A.M. Best reports that the financial ratings for AIG’s personal lines companies remained unchanged following reports of the Farmers acquisition. Currently, A.M. Best classifies AIG personal lines with a financial strength rating of A (Excellent), issuer credit rating of “A” and a negative ratings outlook. While the ratings are not expected to change as a result of the acquisition, it is likely the ratings outlook will be changed to “stable” from “negative” to reflect Farmers’ current ratings outlook.

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

Legal Advocacy 
Update on Red Flag Rule 
Any compliance obligation by agencies is determined by individual agency activities.

The Identity Theft Red Flag Rule became effective Jan. 1, 2008, with mandatory compliance beginning May 1, following a six-month delay in enforcement. The FTC indicated that during this six-month delay period, it planned to engage in outreach and provide education about the application of the rule. On April 2, the FTC unveiled a new Web site about the rule. That Web site does not appear to provide new information that alters the interpretation or application of the rule.
 
In short, the rule requires “financial institutions” and “creditors” that hold “covered accounts” to implement a written program to detect warning signs or “red flags” of identity theft, so that identity theft can be prevented and mitigated.

Some key definitions under the rule include:
 
Financial institutions: State/national banks, state/federal savings and loan associations, mutual savings banks, state/federal credit unions or any other entity with an account from which the owner makes payments/transfers  

Creditor: A person, business or entity that provides goods or services in advance of receiving payment (e.g., arranges, extends or renews credit)

Credit: The right granted by a creditor to a debtor to defer payment of a debt or to purchase property/services and defer payment for them

Covered account: An account used for a personal, family or household purpose involving multiple payments (e.g., credit card accounts, checking accounts, car/home loans)

The FTC appears to be taking a broad view of what activities meet the key definitions under the rule. That creates questions by insurance agencies about whether they need to comply with the rule and if so, the nature of the compliance. Since every insurance agency operates differently, there is no single answer that applies across the board for all agencies. Each agency needs to assess the key definitions under the rule carefully in light of its own unique operations and activities. An insurance agency only needs to comply with the rule it if acts as a creditor or financial institution and has covered accounts, not merely because of its status as an insurance agency. For example, if an agency’s business is direct-billed by carriers, then it appears the agency would not be a creditor nor have any covered accounts, and thus would not be subject to the rule. On the other hand, if an agency provides or arranges premium financing for any insureds, then the FTC could take the position that the agency is acting as a creditor with covered accounts and needs to comply with the rule. 

While the rule does not appear to be targeting the basic activities of many insurance agencies, it is impossible to predict whether the FTC will try to characterize some of those activities as covered by the rule. Being a creditor under the rule requires that goods or services be provided in advance of payment, such as occurs when retailers arrange credit for consumers to purchase goods. But since insurance is a continuous service over a period of time, it is arguably not generally provided in advance of payment for all the service provided. 

Agencies wondering whether the rule applies to their activities can seek guidance from local counsel. In addition, some agencies in this position, out of an abundance of caution, may choose to comply rather than spend time or money seeking a definitive answer to a question that may, by virtue of the way the rule is written, be unduly complex.
   
Insurance agencies that do not fall within the definition of a financial institution or creditor under the rule are not required to comply. The acceptance of credit card payments alone does not make an entity a creditor under the rule, nor does merely referring a customer to a financial institution, such as for a loan. However, if a business, including an insurance agency, has “covered accounts” and conducts business in a way that meets the definition of a “financial institution” or “creditor” under the rule, compliance is required. 
 
For an agency owned by an entity that meets the rule’s definition of a creditor or financial institution and that has covered accounts, the entity that owns the agency should be aware of the rule and may determine the appropriate program to be implemented. 

For entities subject to the rule, there is no standard program they can adopt, as the program must be customized to the entity’s size, complexity, organizational structure and business operations/activities. Any such program must include reasonable policies and procedures to detect red flags of identity theft in covered accounts and prevent and mitigate identity theft in connection with the opening and maintenance of covered accounts. 

A program must enable the entity subject to the rule to:

1. Identify red flags (described below) relevant to the entity’s experience, industry and likely risks;
2. Detect the red flags identified;
3. Respond appropriately to red flags that are detected in an effort to prevent and mitigate identity theft; and
4. Update the program periodically to reflect changes in risk.

Red flags or warning signs of identity theft may stem from events such as past incidents of identity theft, reports in industry publications and information published by regulators like the FTC. Examples of red flags can include warnings/alerts from credit bureaus, presentation of suspicious documents and notices from a person who believes he/she has been a victim of identity theft.

An entity required to have a program must have the initial program approved by its board of directors or an appropriate committee of its board of directors. In addition, the board of directors, an appropriate committee of the board or someone from senior management must be involved in the oversight, development, implementation and administration of the program, and the entity’s staff must be trained to implement the program. 

An entity subject to the rule can face civil penalties by the FTC for failure to meet its requirements. It is uncertain whether private lawsuits are permitted for rule violations.

Insurance agencies can adopt an identity theft program even if not required to do so by the rule. The program requirements under the rule may provide a good starting point for these agencies seeking parameters for what is important to consider in such a program.

A summary of the rule is included in a memo called “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. The summary is available to members at www.independentagent.com under “Legal Advocacy.”

Additional information on the Red Flag Rule is available from the FTC by clicking here.

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

On the Hill 
Big “I” Urges Congress Not to Rush Health Care Reform
Proposed action could bypass proper deliberation and debate.

The Big “I” was joined by several organizations representing health insurance advisors, agents, brokers, consultants and employee benefits specialists in sending a letter to congressional leaders urging them to oppose efforts to include health care reform in the budget reconciliation instructions.

Each year when Congress writes the budget resolution, they may include reconciliation instructions for the purpose of legislating mandatory spending and tax revenue policy proposals. Under normal Senate operating procedures, it takes 60 votes to prevent a filibuster and pass legislation. With reconciliation, it only takes 51 votes to gain passage of a measure.

The full text of the letter follows:

April 22, 2009

The Honorable Kent Conrad
Chairman, Senate Budget Committee                          

The Honorable John Spratt 
Chairman, House Budget Committee
               
The Honorable Judd Gregg
Ranking Member, Senate Budget Committee                           

The Honorable Paul Ryan
Ranking Member, House Budget Committee

Dear Chairmen Conrad and Spratt and Ranking Members Gregg and Ryan:

We, the undersigned organizations, representing health insurance advisors, agents, brokers, consultants and employee benefit specialists, are writing to strongly urge you to exclude health care reform from the budget reconciliation instructions. An issue of this magnitude deserves its due consideration under regular order.

We applaud Congress and the Administration for making health care reform a top priority this year and agree that this legislation must be a bipartisan product with consultation and cooperation from the American public as well as stakeholders representing all sides. However, we fear the spirit of bipartisan cooperation will be lost if regular order is put aside and the reconciliation process is utilized to fast track health care reform legislation. The future of the nation’s health care system deserves nothing less than an open, bipartisan and transparent debate by Congress.

As you begin deliberations in the conference committee, we hope you will support the Senate position and oppose any effort to inject health care reform into the budget reconciliation instructions.

Thank you for your attention and consideration to this very important issue.

Sincerely,

AHIA – NAIFA Health & Employee Benefits (AHIA)
The Council of Insurance Agents & Brokers (CIAB)
Independent Insurance Agents & Brokers of America (IIABA)
National Association of Health Underwriters (NAHU)
National Association of Insurance and Financial Advisors (NAIFA)

CC: United States Senate
United States House of Representatives
The Honorable Kathleen Sebelius
The Honorable Nancy Ann DeParle
The Honorable Peter Orszag

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

Legal Advocacy 
EMC Enhances Agency Contract
Big “I” input assisted the company.

The Big “I” commends EMC for making a number of positive enhancements to its agency appointment agreement. As the document that lays the foundation for how a company and agency work together, the appointment contract is critical to both.

“EMC demonstrated the importance it places on its independent agents by considering and adopting many changes recommended by IIABA that show the high value the company places on its distribution force,” says Debra Perkins, Big “I” executive vice president and general counsel. 

“As a Trusted Choice^® partner, EMC takes its commitment to independent agents very seriously. IIABA helped us reach our goal of offering our agents a contract we feel is responsive to their needs,” says Beech Turner, vice president of marketing at EMC. “We appreciate IIABA’s input and cooperation as we evaluated and updated our agency agreement.”

Some of the enhancements to EMC’s new agency appointment contract include its broader protection for agents’ exclusive ownership of expirations; improved access for agents to policyholder information after termination; specification of terms for renewal/run-off commission; greater flexibility for agent use of non-public personal information on policyholders as permitted by law; and confidentiality provisions that are consistent with the agent’s exclusive ownership of expirations.

“These and the other changes to the contract made by EMC, especially in such an unpredictable and challenging economic climate, demonstrate its desire for and commitment to a strong partnership with its agents,” says Perkins. 

For a copy of the contract review on the new agreement, log on to www.independentagent.com, go to “Legal Advocacy,” “Contract Reviews” and then select the EMC review.

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

Tech Updates
Attracting Younger Customers 
Independent agents’ appeal to younger generations will take time.

For years, independent agents have been trying to capture young consumers and turn them into customers; however, targeting millennials (those younger than age 28) is a long-term investment because they may not have a need for complex insurance products yet.

The good news is that independent agents now have the competitive insurance products to do what their competitors have been doing for years. Agents need to look at the life-time value of these insureds because soon they will be starting families, purchasing homes and establishing businesses. If agents have a presence on Internet forums where young customers are comfortable, they will recognize them for what they are – trusted advisors.

Internet customers are known to lack loyalty, but agents still need to reach out to these customers, work to develop relationships and add value to their purchasing process. If a consumer gets a quote and a policy with no counseling, there is no value added and that customer is likely to change carriers frequently. But if agents are able to insert themselves into the process by offering additional quotes, optional coverage and insurance advice, they can change the customer into a loyal client. As younger customers become familiar with IAs’ services, they will seek advice for their more complex coverage needs. Research has shown that consumers may do their research on the Internet, but most still want to do business with people and buy insurance from them.

Today’s consumers are bombarded with the advertising claims of direct-writer competitors who can provide quotes in only 15 minutes. And without Real Time processing, independent agents are unable to meet these consumer expectations because our archaic processes are too slow. There is still far too much clerical effort required in the agency office. Agents need to demand Real Time from their carriers and MGAs so they can provide direct value-added service to their clients and use their time to create relationships and make sales.
 
So what new competition does the future hold? Last fall, the Agents Council for Technology (ACT) sponsored a technology forum at the Big “I” Young Agents Leadership Institute to discuss generational differences and technology preferences from the perspective of young agents. The group of more than 70 young people felt that Internet distributors, niche marketers and larger cluster agencies will be major forces in the next three years. With new technology emerging at exponential rates, the agency of the future will have great opportunities to leverage these new applications to expedite sales and servicing. Agencies that stay on top of technology by keeping up with the current versions of their systems and implementing available tools (such as Real Time, Commercial Lines Download and electronic information management) will be best positioned to take advantage of these new opportunities. Technology enables machines to do the clerical and mundane work to free agents and CSRs to do what they do best – work with people and make sales.

This article is part two in a two-part series exploring the technology needs of young agents and customers. To read part one, click here. 

Angelyn Treutel (Angelyn@treutel.com) is treasurer, vice president and chief information officer of Treutel Insurance Agency and chair of the Agents Council for Technology. 

For more information about ACT, contact Jeff Yates, ACT executive director at jeff.yates@iiaba.net. 

This article reflects the views of the author and should not be construed as an official statement by ACT.