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Big “I” National News

P&C Trends
A Windy Forecast
Tornado losses reach record levels in first quarter 2008, may soon rival those from hurricanes.

Three tornadoes ripped through southern Virginia on Monday, damaging scores of homes and injuring approximately 200 people. The twisters shredded roofs, knocked down power lines and overturned cars, leaving a wake of destruction in their path that caused Virginia Gov. Tim Kaine to declare a state of emergency. Unfortunately, the scene is a familiar one --- already this year tornadoes have wreaked more havoc nationwide than the previous four-year average, according to a new report from A.M. Best.

“If the first quarter is any indicator of likely tornado activity for 2008, insurers may be headed again this year for another long season of increased claims activity and high catastrophe losses,” says A.M. Best’s U.S. Tornado --- Catastrophe Review.

What’s even more troubling is that losses of $1 billion or more are becoming more frequent and will soon approach those of hurricanes if they continue at their current rate.

“Already in 2008, insured losses from severe weather systems have surpassed $1 billion --- about $850 million stemming from the Super Tuesday tornado outbreak in the mid-South on Feb. 5 and 6,” the report says. “Early damage estimates from a March 14 tornado that struck downtown Atlanta and surrounding counties are $340 million and are likely to go higher.”

Catastrophe losses from tornadoes and other weather-related events have been a consistent burden on insurers’ financial results, even in recent years when the industry’s losses were below average. For example, in 2006 the p-c industry’s combined ratio was 92.4 and underwriting results were strong, however, that year tornadoes and other related weather events cost insurers a record-setting $8 million in losses. On average, the industry has experience approximately $4.9 billion in tornado and other weather-related claims since 2001, but that average is expected to rise.

According to A.M. Best, tornadoes have caused 57% of all U.S. insured catastrophe losses in any give year since 1953, however in 2007 losses from tornadoes reached 69% of total insured catastrophe losses. If tornadoes continue at this rate, smaller insurers, particularly single-state writers with exposures in tornado-prone areas, will be facing increasing pressure on profitability. States with the highest tornado averages are also at risk, including those in the Great Plains area, also referred to as “Tornado Alley,” as well as New Jersey, Connecticut, Massachusetts, Ohio and Rhode Island, which respectively have the highest average expected or modeled insured losses per 1,000 square miles from tornado (or other weather-related) events.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
Rough Waters Ahead
Forecast predicts insurance industry will survive the soft market, but it won’t be smooth sailing.

The soft market will likely continue to cause subdued revenue and profit growth and more rate deterioration for the property-casualty sector for at least the next few years, but it won’t devastate the industry, according to a Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast.

Last year net written premiums were flat, the first year with no lateral premium growth since the ‘40s, however, despite the lack of growth, underwriting profits are projected to total $25 billion --- only slightly less than 2006’s strong results --- which could cushion the industry’s continued fall into the soft market.

“In the final hour, 2007 will be the third underwriting profit since 1978 and the second best in the past 80 years,” Marsh-Berry says. “At the same time, 2007 company net income will total as much as $65 billion, which about matched 2006 net income even after the 2007 rate decreases.”

According to the forecast, the 2007 versus 2006 year-over-year p-c analysis shows an average rate drop of about 13%. In 2008, the total U.S. aggregated p-c net written premiums are expected to fall 0.3% --- the first decline since 1943. Yet even after the price reductions, the combined ratio for this year will be approximately 97.3.

“Logic would suggest that if the economy falls into a spiraling recession prompting a prolonged interest rate squeeze and a continued downward trend in the investment markets, p-c insurance companies will need to stabilize or increase rates given shrinking returns on bulging surplus. But a prolonged recession is not likely,” the forecast predicts.

While industry is expected to weather the soft market, it won’t come out of it unscathed. Many companies are pursuing rate reductions, which is counter-intuitive to maintaining favorable return on equity ratios. And while operating income in 2007 was high, the return on equity (ROE) dropped due to a strong pre-tax operating income that was overshadowed by a large year-over-year increase in surplus. That drop is expected to continue through this year and beyond, as ROE falls to the high single digits.

“The ROE projections show a continuing decline given a projected quadruple whammy of increased loss ratios on core business, increased catastrophes, worsening expense ratios and further increase in the surplus,” the forecast says. “But even with dire predictions, continued soft market conditions are overwhelmingly being predicted by analysts for the next three years. When all the dust settles, falling return on equity projections will still outperform long-term historical levels.”

*Editor’s Note: This is part one in a series covering projections from Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast. Next week’s edition of Insurance News & Views will examine predictions for agency valuation.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




L&H Trends
The Framework of Reviewing Investments
The struggling economy is no reason to change a life insurance policy.

Difficult economic news has dominated the headlines for the past 10 months. It started in mid-summer 2007 with the beginning of the subprime mortgage meltdown.  What started as a seemingly isolated business problem --- the inability of mortgage holders to meet their monthly payments --- triggered higher interest payments and resulted in some homeowners walking away from their homes. That, in turn,  led to depressed housing prices in certain areas and spread as the subprime securities were packaged off and sold to a broad spectrum of institutional and individual investors.

Turning the clock forward to late 2007 and 2008, the Federal Reserve reduced the overnight Federal Funds rate charged to banks that borrow money in an effort to keep the economy from stalling. However, lower interest rates led to a devalued dollar, resulting in higher energy prices. An unexpected shortage for certain food commodities has also created inflationary pressures. As the economy stalls and some sectors trim jobs, the result is a higher unemployment rate coupled with rising prices, a difficult combination as consumers lose confidence and rein in their purchases --- particularly for high priced capital goods.

With all this dismal economic news, what should investors and agents who have customers with variable life insurance policies and variable annuities do? The answer is not much. The reality is that unless there has been a significant change in the policyholder (or annuity holder’s) objectives or immediate financial needs, they shouldn’t do anything. There has always been difficult periods during the economic cycle.  However, everyone is prone to a psychological concept known as recency. Recency is the tendency to put too much weight on current economic conditions and not take into account long-term historic, economic trends. This was common in the ‘20s when investors were caught in the raging stock market and again during the “high-tech bubble” of the late ‘90s when price/earnings ratios were astronomical and difficult to justify based on the stock price.  

Investors who are swayed by recency tend to buy stocks of “hot” companies that have risen dramatically and, conversely, shun companies that share negative prices and earnings reports. The role of the agent is to point out to customers that if their needs and goals are long term, then so is their timeframe. Sometimes the best decision any investor can make is not giving in to the impulse to take action based on positive or negative economic news. Astute investors understand that market cycles, sector rotation and other cyclical outcomes are inevitable as the market seeks to reach equilibrium between risk and return. Most importantly, it’s nearly impossible to be prescient enough to anticipate the market swings because there are so many factors --- climate, political and economic to name a few. The shrewd investor has the maturity to periodically rebalance their portfolio to reach their targeted asset allocation, and unless there is a dramatic change in their situation, they let the market take care of the rest.

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




Tech Update
Top 10 Reasons to Use an Agency Management System
Are you taking advantage of everything your system has to offer?

Industry statistics reveal that 90% of agencies use an agency management system.  Whether your agency is large or has only one staff person, an agency management system improves agency efficiency and reduces costs. Here are the major benefits every agency can attain by using an agency management system:

10) Centralize your customer files. An agency management system provides a single location for all customer information (including e-mails), which can be easily backed up to prevent loss of information. No more worries about disaster preparedness.  No more backlogged filing. No more problems duplicating information or looking up previous documents. The same customer information can be accessed from every employee’s desk top.  

9) Improve E&O documentation. Consistent workflows in your agency are easier with an agency management system, because there is a centralized location for all scanned information and notes for carriers, vendors, employees, accounting, prospect information and all client documentation. The system creates a permanent audit trail.  

8) Extensive reporting capability. Reports from your agency management system provide you with information on your book of business, management reports on employee productivity and sales growth, expiration lists, call analysis reports, binder logs, production reports and marketing analysis and more.

7) Download of policy information and automated invoicing. Policy information from carriers can be directly loaded into your agency management system without the need for re-keying. Transactions can be automatically invoiced into your system without the need for handling policy declaration pages. Direct bill commission statements can be downloaded to automate the allocation of commissions to particular producers.  Commercial lines download has improved in recent years, giving agents the same benefits they have been getting from personal lines download for years.

6) Claims tracking capability. Claims status reports are available in your agency management system to assist your staff with providing superior service to your clients.  Some carriers are beginning to provide the ability to download claims information directly into your agency management system to avoid manual updates.   

5) Financial reporting. Instead accessing individual carrier sites to obtain commission reports, your agency management system can directly download commission information from the carriers and provide you with useful  reports on profit, cash flow, accounts receivable, payroll and payables.

4) Integration with third-party applications, including Outlook, Word, Excel, e-mail and voicemail. All letters, memos, proposals, spreadsheets, emails, voicemails, etc. are able to be tracked in your agency management system. You can also create templates for commonly used customer letters to save typing. Whenever you need any customer document, you no longer have to pull the file.

3) Enhanced ability to cross-sell and re-market. Your agency management system centralizes all client and prospect information which can be used to obtain quotes, move a book of business and identify opportunities for cross-selling and other sales opportunities.

2) Improved profitability and professionalism. Efficient operations result in higher profits. Clients receive more professional service when your staff is able to devote more time to service by not having to deal with unorganized pieces of paper.

1) Real Time makes your life easier. Using Real Time from your agency management system eliminates the need to remember separate logon IDs and passwords for each carrier. With the click of a button in your agency management system, information is transferred from your agency system to the carrier’s system without the need to re-enter information for quoting, inquiry and endorsements. Real Time represents the next major advance in agency workflows --- enhancing both agency efficiency and customer responsiveness. 

The agency management system has long been the hub for the agency’s internal operations providing a central location for agency information.  With the advent of Real Time coupled with download, the agency management system has now taken on an external focus as well, giving agents a consistent, efficient workflow to use when interfacing with their carriers.

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

ACT is part of the Independent Insurance Agents & Brokers of America and its Web site can be found at www.independentagent.com/act. 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.



Agency Management
Being “Good” for Your Customer
Giving customers what they need is more important than giving them what they want.

One of my clients Todd Walker of Network Communications, which publishes monthly real estate books that market residential properties, had a great comment about how he takes care of his customers --- the real estate agents and brokers that buy the ads in his books. He asks them, “Do you want me to be good to you or good for you?”

Think about that question for a moment. Being good to the customer means you take care of them, give them great service, etc. But being good for the customer is different. It is helping them or enhancing their experience.

Sometimes it is easy to enhance an experience or increase the value of your products or services by just making suggestions or helping the customer. Other times you have to sell more. Up-selling sometimes scares sales people, but it has to be done. It is a disservice not to up-sell the customer when it is appropriate and necessary to the success of the product.

As mentioned above, Walker sells advertising in a book. Being good for the customer means the sales person can help design the advertisement for the customer. They may even suggest a larger advertisement, not because it brings more revenue to Network Communications, but because it will truly create better results for the customer. The sales representative is helping the customer receive maximum impact for the advertising dollars.

How about the server at a restaurant that suggests the guest try a new appetizer? The server could just take the food order, but instead is suggesting something that might add to the enjoyment of the meal. Yes, it adds dollars to the check, but it also enhances the experience.

Recently, at a retail golf store I saw the sales person sell some expensive golf clubs.  What compelled the customer to buy the clubs on the spot was when the sales person said, “I could sell you these clubs today and I know you would be happy with them. But I won’t sell them to you until I make sure they are the right clubs for your golf swing. So, let’s step over to our practice facility and make sure you are comfortable with these clubs.”  Fifteen minutes later the customer felt like they had a golf lesson – with clubs that would help improve the game. Sold!

Let’s take Walker’s question a bit further. The question is really a philosophy. There really isn’t a choice. The customer deserves to have both. We should be good to and for the customer. Posing it as a question is only for the benefit of the customer.

In conclusion, don’t just take care of the customer. Help the customer. Don’t just be good to the customer, be good for the customer. Show value, create an experience and always strive to exceed their expectations.

To read the entire article, click here.

Shep Hyken (shep@hyken.com) is a professional speaker and author who works with companies that want to develop loyal relationships with their customers and employees.