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Big “I” National News

Legislative Conference & Convention

TRIA, Small Business Take Center Stage
Lieberman calls on Congress to make TRIA permanent, Blunt addresses small business concerns.

Speaking at the National Legislative Conference Breakfast this morning, Sen. Joe Lieberman (ID-Conn.) and House Minority Whip Roy Blunt (R-Mo.) praised the efforts of independent agents and brokers for working on behalf of their clients. Lieberman focused on the need to make TRIA permanent and implored Congress to set aside their partisanship divides to work toward solutions. Blunt also touted TRIA and discussed small business concerns.

Lieberman, whom Big “I” CEO Bob Rusbuldt introduced as “the conscious of the U.S. Senate,” joked about his “independent Democrat” party status with the agent audience, saying “I feel particularly at home this year with my fellow independent agents.”

The senator took a strong stance on TRIA. “TRIA needs to be extended again,” he said. “It has had, in my opinion, the exact intended results. It is time to make TRIA permanent.”

Lieberman took his position a step further, saying that TRIA should be expanded to cover chemical, nuclear, biological and radiological attacks. “We need to do all we can to detect and deter terrorist attacks,” Lieberman said. “We also need to be able to pick ourselves up (if one happens). We cannot do it without making TRIA permanent and without a stable insurance industry.

“This enormous exposure must be shared by the government and the private sector,” he said.

On the topic of national catastrophe risk, Lieberman said he supports the idea of creating a commission on catastrophe risk.

He also stressed the need for Democrats and Republicans to put aside partisan divides and to communicate with---not just talk at---one another. “We can seize this extraordinary opportunity that exists at this point in time, but we will not unless we put partisanship aside,” he said. “What’s best is America’s side. It’s time for (partisanship) to stop.”

Blunt emphasized the need for modernizing the government’s operations. “You do your business totally different than the way you did 10 years ago,” he said. “The government does it the same way it did 20 years ago.”

The government needs to follow the lead of the corporate world, where efficiencies are gained by doing more with less, he said. “The government is the last place in America where you believe you show how much you care about something by how much money you spend on it,” he said. “That’s a wrong-handed view. The government needs to catch up to the private sector.”

Under the current budget, tax levels are set to revert to 2000’s levels in 2011. If that happens, according to Blunt, tax rates for the highest tax bracket will increase---and small businesses owners comprise 65% of that bracket.

“When they are talking about raising the highest rate, they are talking about you,” he said. “The good news is that doesn’t happen until 2010; the bad news is that two years from now if Congress is still on that course, people will begin selling their businesses.”

Blunt also touched on the topic of TRIA. “TRIA for group life insurance is important,” he said. “Look at the world we live in and understand you may not be able to insure yourself if your insurer looks at the area you live in (and determines it high risk).”

Independent agents and brokers play an important role in society, and Blunt said that role does not go unnoticed. “What you do helps people compete, helps people sleep, helps people know that their lives are protected,” he said. “It’s important, and I appreciate it.”

Jennifer Sikorski (jennfer.sikorski@iiaba.net) is IA’s managing editor.

P&C Trends

Record-setting Profits Confirmed
Final reports for industry solidify underwriting profit, combined ratio.

The final tallies are in and the property-casualty industry has clearly come out on top.

A lack of major catastrophe losses and other natural disasters in 2006 led to a $31.2 billion net gain on underwriting for the p-c industry, according to the Insurance Information Institute’s Full-Year 2006 Results. The industry also saw its best underwriting performance since 1949 with a combined ratio of 92.4.

The strong underwriting results amounted to a $63.7 billion increase in net income (after taxes) for the industry in comparison to the $44.2 billion posted in 2005. As a result, the industry’s rate of return on average policyholders’ surplus rose to 14% last year, up from 10.8% in 2005, according to ISO and the Property Casualty Insurers Association of America (PCI), and direct insured losses from catastrophes fell to $9.2 billion in 2006 from $61.9 billion in 2005.

“Much of the improvement in insurers’ underwriting and overall results last year reflects the decline in catastrophe losses from 2005’s record high,” says Michael Murray, ISO assistant vice president for financial analysis. “Allowing for losses from Katrina, Rita and Wilma that didn’t emerge until after the Florida Hurricane Catastrophe Fund, and foreign insurers---ISO estimate the catastrophe losses included in private U.S. insurers’ net financial results declined by $21.9 billion to $11.7 billion in 2006 from $33.6 billion in 2005. ISO also estimates that catastrophe-related net loss adjustment expenses declined to $600 million in 2006 from $41.2 billion in 2005, contributing another $600 million to the improvement in underwriting results.”

Net written premiums rose in 2006, climbing from $425.5 billion in 2005 to $443.8 billion and written premium growth improved to 4.3% in 2006 from 0.3% in 2005. Net earned premiums also increased by $18.2 billion to $435.8 billion in 2006 and earned premium growth accelerated to 4.4 percent in 2006 from 0.9% in the previous year.

Overall loss and loss adjustment expenses fell $27.6 billion (9%) to $283.7 billion last year from $311.6 billion in 2005.

Insurers’ overall profitability, measured by their statutory rate of return on average surplus, increased to 14% in 2006 from 10.8% in 2005---the highest rate since 1986 when it was 15.1%---but those numbers aren’t expected to continue, according to Bob Hartwig, president and chief economist at the Insurance Information Institute.

“Last year almost certainly represents a cyclical peak in property-casualty insurance industry profitability,” he says. “Since 1975, historical peaks in profitability have occurred at intervals of nine to 10 years, implying that the next peak will not occur until 2015 or 2016. At the same time, profitability will assuredly begin to ebb in 2007. The Insurance Information Institute estimates profitability will fall to 12.5% this year and 10% in 2008, assuming normal catastrophe losses. History suggests that the interval from profit peak to profit trough is six years, with an average trough return on equity of 1.9%.

“The bottom line is that insurers could well be experiencing low single digit rates for return (i.e. below 5%) perhaps as soon as 2010 and probably no later than 2012,” Hartwig says.

While last year’s results were extremely favorable, they were an anomaly and a return to normalcy is expected this year. Colorado State University forecasters are predicting 17 named storms, five of them intense. These predictions are actually above the average 9.6 named storms and 2.3 intense storms and Genio Staranczak, PCI’s chief economist, says the industry should take heed.

“Experts are now predicting that the 2007 hurricane season will be far worse than average, and huge parts of the U.S. remain vulnerable to earthquakes that can strike at any time,” Staranczak says. “Bottom line, natural catastrophes pose a huge and growing threat to consumers and businesses across the country. Insurers, state and federal governments, private businesses and individuals must continue to better prepare themselves by ensuring that financial reserves are adequate, strengthening building codes and land use regulations and putting in place catastrophe recover plans to speed relief to those who need it after a disaster occurs.”

Hartwig also warns that the worst is yet to come.

“Hurricane Katrina---with $40.6 billion in insured losses---was the most expensive disaster in global insurance history, but that event, as terrible as it was, only foreshadows what is yet to come,” he says. “Insurers and reinsurers today actively plan for a $100 billion event (or sequence of events summing to $100 billion). There are a frighteningly large number of scenarios capable of generating a $100 billion loss, ranging from a repeat of the 1906 San Francisco earthquake, to a strong hurricane striking Miami or New York, to a major terrorist attack.”

The I.I.I.’s final report for 2006 is based on “consolidated estimates for all private property-casualty insurers based on reports accounting for at least 96% of all business written by private U.S. property-casualty insurers.”

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

L&H Trends

The Housing Market and Retirement Connection
Don’t let customers count on funding their retirement by selling their home.

Sales of existing homes plunged in March by the largest amount in nearly two decades, reflecting bad weather and increasing problems in the sub-prime mortgage market, a real estate trade group reported Tuesday.

The National Association of Realtors said sales of existing homes fell by 8.4% in March, compared to February. It was the biggest one-month declines since a 12.6% drop in January 1989, another period of recession conditions in housing. The steep sales decline was accompanied by an eighth straight fall in median home prices, the longest period of falling prices on record. The median price fell to $217,000, a drop of 0.3% from the price a year ago.

The national housing market clearly is having a soft landing. The market is cyclical and greatly influenced by interest rates, unemployment and the economy at large. The usual way to deal with cyclical industries is to have patience and the financial resources to wait out the unfavorable period. However, the housing market impacts and influences the economy both in a macro sense (purchases of commodities and appliances) and in a micro sense (housing is generally the family budget’s largest expenditure).

According to a 2006 Fidelity Survey, 22% of baby boomers say they’ll rely on the sale of their homes for income in retirement. This is worrisome, especially when you consider that 75% of workers have less than $10,000 saved for retirement, according to a 2006 Harris Interactive Poll for the AICPA. And more than half of workers age 55 or older have less than $50,000 saved for retirement, according to the Employee Benefit Research Institute’s 2006 Retirement Confidence Study.

With Social Security and Medicare’s looming funding issues, primarily relying on selling a home as the significant funding option for retirement is not a sound option. The problem is that the general public is not receiving advice from financial professionals about prioritizing their saving and spending habits. Many people are not saving enough after paying their housing and general living expenses. While real estate has appreciated and, depending on when and where a person bought their home, they can have a considerable asset. But, their standard of living in retirement could be significantly impacted by market conditions when they want to sell their home.

Independent agents should educate their customers about longer life expectancies, funding long term care and saving for retirement. Helping someone arrange their budget so that they can put money in a 401(k) plan or a ROTH IRA can be very valuable assistance. Independent agents can serve as trusted advisors and fill an important void. Putting information on the agency’s Web site, having financial brochures and meeting with customers to discuss their objectives will be a win-win for the agent and their customers.

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

Forms & Substance

CGL Cross Liability & Severability of Interests

The Big “I” Virtual University "Ask an Expert" service recently  received a rash of "cross liability" questions. The term "cross liability" deals with whether or not one insured can sue another insured under a liability policy. Contract requests to provide this coverage under a CGL policy usually arise from ignorance on the part of people who have led someone to believe they know something about insurance.

Among the cross liability questions the VU received:

"I had a certificate request that wanted the policy language to include a severability of interest provision and to remove the cross-liability exclusion. I have not seen this before. What are your thoughts?"

"I need information about an endorsement under CGL called a cross liability endorsement. Where can I find information about this endorsement?"

The current ISO CGL includes severability language and there is no cross-liability exclusion. Here are the responses of VU faculty members:

• The "cross-liability" related language was put into the CG 00 01 in 1986. It is found in the form conditions:

Separation of Insureds: Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this coverage part to the first named insured, this insurance applies: As if each named insured were the only named insured; and separately to each insured against whom claim is made or "suit" is brought.

• Why people still ask for a "cross-liability" endorsement to remove a nonexistent exclusion (unless they want to limit such suits) is a mystery. In fact, some states may have a statutory provision prohibiting the use of cross-suit exclusions in most basic liability policies. Most likely, it’s dealing with attorneys or consultants who either aren't "up" on things, or they don't even know what they're asking for---they're just looking at an out-dated cheat sheet that says they should ask for this.

• On the contrary, a typical cross-liability endorsement will insert an exclusion preventing such suits. See Inter-Company Products Suits endorsement CG 21 41. This allows the removal of inter-insured sales from the premium base, in return for an exclusion that states that an insured cannot sue another insured. So, it’s easy to see that it's more common to add, via endorsement, an exclusion for cross-liability suits rather than add an endorsement to prevent such suits.

• Again, my best guess is that whoever drafted the "RFP" wording for the certificate either doesn't know what her/she is doing, isn't current on policy coverages or just wants to make sure that cross-liability suits are not excluded. Of course, all of this assumes that the ISO CGL form is what’s being dealt with. In any case, it’s best to let the company underwriter handle this.

For the VU’s response to the final question, click here. 

Agency Management

Improving Prospecting Through Integration

When marketing techniques are “integrated,” one type of marketing uses the byproduct of another to create increased efficiency. When related to prospecting, integration will help agents find more prospects for less work and less money.

Direct mail can be an effective prospecting tool when used wisely. There are four main parts to direct mail:

• Collateral – This is the physical make-up of mail. In most cases, black-and-white printing using copy paper and #10 business envelopes are all that are needed to start.

• Message – This is what is said in the mailing. It is the sales pitch or offer. When prospecting for insurance, the best messages focus on seeking current interest and are proactive (i.e. always include a reply prompt, such as, “Please complete and return this form for more information.”)

• Mailing Cycle – This is how often the direct mail will be sent to the same prospects in a market segment (i.e. once every 90, 120 days etc.). Recurring mail is generally more effective over the long term than one-time mailings.

• List – This is the target list of people to whom the direct mail will be sent. Assuming a reasonable job is done working out the other elements listed above the quality of the list will become the most important element. In short, the best or most highly qualified list will achieve the best results.

Direct mail is powerful because of its ability to reach all (or most) of the individual prospects in a given market segment. It is also powerful because it leverages communication to a written form that can be copied and distributed widely verses relying solely on word of mouth.

One of the biggest challenges with direct mail is that it does not enable the marketer to collect qualifying information. Pre-mail list “scrubbing” to remove unqualified names based on demographic considerations is effective only up to a point. When mailing to a general list, an agent may end up sending mail to a significant number of unqualified prospects. If the mail is sent regularly or in “cycles”---which should be the case---an agent will end up sending mail to those same unqualified prospects over and over again with no conceivable way of removing them from the list.

Any qualifying or disqualifying information collected through other marketing activities can be used to improve mailing results. Therefore, throughout all other marketing, be sure to add any qualified leads to the mailing list and remove any disqualifying leads.

Consider the following ways to collect qualifying and disqualifying information in order to improve a mailing list:

• Phone work - If an agent is in a market that allows him/her to make telephone-prospecting calls, he/she can achieve fantastic synergy by integrating calling with direct mail. The biggest weakness of direct mail is the biggest strength of the phone. In short, the phone can be an open line for collecting useful qualifying information. 

• Primary research – This is information collected about prospects based on intuition, knowledge and experience. It is information that allows an agent to either upgrade or downgrade a particular prospect based on his/her short or long term potential to become a customer.

• Surveys - Create a survey form with some basic questions that will help qualify prospects that can be completed and returned. Seek opportunities to put this form into the hands of potential prospects such as seminars, trade shows or other marketing events.

Be sure to obey all laws relating to telemarketing and customer privacy. Mailing list development takes time and energy, but it is well worth it. Over time an agent will create a solid list of prospects with whom he/she can regularly communicate on a favorable basis. By integrating prospecting efforts in this manner, an agent will do a better job of qualifying prospects, achieve greater efficiency in mailings and ultimately, make more sales.

Ted Stevenot(www.prospectingfactory.com) is author of “Prospect Factory.”