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Big “I” National News

Legislative Conference & Convention

A Multi-Faceted Face-off
Leaders address key issues during Big “I” panel discussion.

What happens when an insurance commissioner, a congressman, an independent agent, an insurance company president and a consumer advocate converge in the same room to discuss the challenges and opportunities facing the independent insurance industry?

Communication, disagreement and even a little collaboration were just a few of the outcomes when the Big “I” held a panel discussion and town-hall style meeting last week during its annual legislative conference and convention.

The Big “I” assembled a diverse panel of industry stakeholders including: Alex Soto, Big “I” president; Bob Hunter, director of insurance, Consumer Federation of America; Roger Sevigny, New Hampshire insurance commissioner and vice president of the National Association of Insurance Commissioners (NAIC); Rep. Earl Pomeroy (D-N.D.), a former insurance commissioner and former NAIC president; and Tom Van Berkel, chairman, president and CEO ;The Main Street America Group. Big “I” CEO Bob Rusbult moderated the discussion, which covered key industry issues such as McCarran-Ferguson, regulatory reform and natural disasters and flood insurance.


Natural Disasters

Rusbult: Post Sept. 11, the industry was praised for the way it handled claims, everyone was happy with the way we handled claims. Post-Katrina, everyone has criticized industry…Why?

Van Berkel: “If you look at the period proceeding that, the insurance industry was about 7% on ROE, which is half of what Fortune 500 were getting…2006 was the first year the industry matched the return of the Fortune 500. I would applaud the independent agents in the room today for the great efforts you do on behalf of the American consumer.”

Rusbult: Was there a failure in Gulf Coast states?

Sevigny: “In my view you’ve got to do more than take a high-powered rifle and put a bullet in the heart of something. The delivery system we’ve got needs to be fixed…the consumer is trying to deal with three different entities…I’m a proponent of a system that would take those coverages and put them in one place.”

Rusbult: Insurance companies were criticized about claim handling post-Katrina; what does the Big “I” think will help?

Soto: “Utilize the resources of the agency. Allow the agent to quickly help their insured …getting information to them and helping them out is really the time we need to shine. While there was a failure in Katrina in the Gulf, with the magnitude of what happened it’s impossible for anyone to have a stable of adjusters to control what happened. If you listen to news enough, you get the impression that nobody had gotten a nickel, but that’s just not so.”

Rusbult: We need markets in a lot of states, not just Florida. What is the solution to this? Is it a federal backstop, tax-free reserving, tax credit for homeowners---or a combination?

Van Berkel: “In disaster-prone states, it’s a combination of what you just mentioned…I would say there is a combination of things, one is rate deregulation. I think we need to be able to match exposures with price. I think we should consider things similar to what PCI has put forward…a federal pro-equity fund. Those things along with some tax-free reserving and homeowners credit would bring capacity back.”


McCarran-Ferguson

Soto: “McCarran-Ferguson allows the independent agent to create and maintain standard insurance forms; both of those issues are important to us. Frankly, some companies want to punish us, but the reality and the irony is that some large companies don’t need McCarran-Ferguson as much as the smaller companies do.”

Hunter: “The ISO is a cartel organization…The ideas that small companies cannot get data is bunk…the small companies do not need antitrust exemption, the larger companies are the ones that need it.”

Pomeroy: “The fact is we have been through all of this before…we all remember the debate of the late ’80s and early ’90s…but I don’t see anything at all on the fast track of McCarran, nor should there be.”

Sevigny: “We truly believe the reason Congress wants to look at McCarran-Ferguson is the wrong reason. I can tell you that as a body, the NAIC believes the repeal of the exemption would be bad for the consumers. …and our job is to protect the consumers.”


Flood Insurance

Soto: “There are a number of people in the Gulf that did everything right and bought all the necessary coverage, but because they had to leave their homes and move out of area, they went out of business because they didn’t have loss of business coverage. We need to raise the limits of available in Florida...I believe we should explore the idea of moving flood back into the homeowners (policy) but still with a federal backstop.”

Sevigny: “Since last year, since floods of last May and floods we experience two weekends ago that were pretty devastating, there was an increase in flood policies in all the cities in New Hampshire. I mandated that flood insurance working with federal registrar…I don’t know how much more I can do to promote, or at least considering flood insurance. If they (consumer) have made the choice not to spend the money, I’m starting to believe that is what happened.”


Insurance Regulatory Reform

Rusbult: Are Democrats going to support a regulatory system?

Pomeroy: “My thought is that the approach introduced (in Congress) so far is going nowhere.”

Rusbult: The Spitzer investigation appears to be winding down. What’s the net result on the whole bid-rigging scandal on contingency arrangements?

Sevigny: “I happened to be a firm believer that the current system we have is broken…it’s one of the major initiatives of the NAIC to this year at agent licensing. There are some states that are going to fight this to the death.”

Pomeroy: “Unfortunately contingency commissions and the local independent agent got dragged into this and as a result it’s become very confusing…I think as we go forward we are going to see a fundamental shift in the way agents are compensated and more and more companies are going to be looking at eliminating contingency commissions they had in the past.”

Sevigny: “Attorney generals are not good regulators. They think they are, but they are not---but I think Spitzer kicked up legitimate problems. We need to be diligent and be proactive and when we’re not, when we get attorney generals get involved, things may go well beyond the things addressed.”

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

P&C Trends

ISO Reports First Quarter 2007 Catastrophe Losses
P-C industry starts year with average losses.

U.S. property-casualty insurers are expected to pay approximately $1.22 billion in claims to homeowners and businesses for insured property losses incurred during the first quarter of 2007.

ISO’s Property Claim Services (PCS) unit attributes the losses to four winter storms and three severe weather events that produced an estimated 204,000 claims in 18 states from California to Florida. The losses were also spurred by severe tornados that ripped across several southern states last month, according to PCS.

“The quarter’s costliest event occurred in early March, when tornadoes raked areas of Alabama and Georgia. While the damage from this harsh weather outbreak cost insurers more than $450 million, a more serious impact was the loss of life associated with the severe tornado activity in areas such as Enterprise, Ala. and Americus, Ga.,” ISO’s PCS report says.

Several insurers have also released estimated losses from first quarter events. Alabama’s second-largest writer of homeowners’ multi-peril, Alfa Insurance Group, says the series of storms that tore through the state in February and March caused between $30 million and $40 million in claims. State Farm says it received 300 structure claims from the tornado that hit Dumas, Ark., in late February and paid out approximately $1.5 million in homeowners and $174,000 in auto claims for the event. Farmer’s Insurance Group, Texas’s third-largest multi-peril insurer, said it received 1,500 claims statewide for the same storm, according to A.M. Best Company, Inc.

Of those 18 states sustaining notable losses, the five with the largest insured property losses were: Georgia ($285 million in losses), Alabama ($175 million), Texas ($167 million), Missouri ($140 million) and Florida ($100 million).

2007’s first quarter losses dropped by $260 million from $1.48 billion in 2006 and are fairly average in comparison to losses from the last decade. The following is ISO’s break down of those losses and catastrophe activity since 1998:

P&C Trends

They’re Not in Kansas Anymore
Tornado study includes some unexpected states.

When Dorothy clicked her ruby slippers together and said “there’s no place like home,” she was longing to return to her wind-swept farm in Kansas, a place well-known for its tornados. But imagine if the “Wizard of Oz” character clicked her soles together hoping to return to somewhere else…New Jersey, perhaps?

It doesn’t have quite the same ring, nor does it make much sense to most people since New Jersey is nowhere near the famed “Hurricane Alley” of the Great Plains. While it’s doubtful that a rewrite is in store for the classic story, there is some merit to New Jersey being the next Kansas, according to A.M. Best’s p-c impairment study.

While the Great Plains states are still No. 1 when it comes to the sheer number of tornadoes and losses, catastrophe modeling shows that New Jersey has the highest average expected, or modeled, insured losses per 1,000 square miles from tornado and related weather activity, according to A.M. Best’s report. Following New Jersey in the ranks are several other surprise states, including: Connecticut, Massachusetts, Ohio and Rhode Island. While tornadoes have occurred in every state across the country, the five mentioned are heavily affected by insured property values in addition to the frequency of the storms.

“Tornadoes regularly take a terrible toll in lives and property loss. Insured losses have the potential to reach $100 billion in a 100-year event, or an aggregated annual 100-year loss of $20 billion or more. Nonetheless, tornado-related insured losses have had limited impact on the insurance industry from the standpoint of raising solvency concerns,” says A.M. Best.

In 2006, tornadoes generated more than $8 billion in insured losses---the worse year on record. And this year seems to be following suit. With the first quarter of 2007 under the industry’s belt, preliminary estimates show there were already 334 tornadoes in the U.S. --- a 65% increase from first quarter 2006.

A.M. Best’s study identifies 51 insurers as impaired due to catastrophe losses, three of which had losses triggered by tornadoes and other related severe weather. Each of the impaired companies is a small insurer with a heavy concentration of risk in a specific geographic area. These three companies had either no Best’s Rating or “vulnerable” (“B” or below) exposure, according to A.M. Best. As far as current ratings, Best already considers an insurer’s exposure to tornadoes and other sever storms in its rating methodology.

For more information on the study or to purchase a copy, go to www.best.com.

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

L&H Trends

Assisting Small Employers with Health Insurance Plans

The latest study released by the U.S. Government Accountability Office (GAO) confirms a trend that most independent insurance agents are aware of: fewer U.S. employers are offering health insurance to their employees.

According to the GAO study, there was an 8% point drop in the share of small employers offering health benefits from 2001 to 2006, and many employers that offer health benefits now make workers pay a higher share of out-of-pocket costs. This is not surprising as medical costs continue to outpace regular inflation. Smaller businesses tend to be more sensitive to price increases as may be unable to pass along the increase costs, which end up squeezing profitability. The study also indicates that some small employers are offering consumer-directed health plans, which trade lower premiums for significantly higher deductibles, or mini-medical plans that provide more limited coverage at lower premiums.

The GAO says that the decrease is attributable mostly to smaller employers. This trend suggests that smaller employers are or will be at a disadvantage in attracting new talent versus larger companies. 

“While the share of large employers offering health benefits remained fairly constant between 2001 and 2006 at about 98 %, the share of small employers (with three to 199 employees) offering them dropped from 68% to 60%,” the GAO report says.

Independent insurance agents should seize on this trend to help their commercial lines customers develop a strategy that will allow them to offer health insurance benefits that will be within their budget. The use of consumer-directed health insurance plans, coupled with pre-tax premium payments and spending accounts, results in Uncle Sam subsidizing the cost of the payments by the taxpayers’ federal/state/FICA tax brackets, which generally run 30% or more. So, just by sponsoring the plan, getting group rates and taking advantage of the tax code, small employers can significantly reduce the cost of health insurance for their employees that don’t have coverage through a spouse or other avenue. Also, they can establish tax-favored dependent care accounts that allow employees to pre-fund daycare expenses that will result in larger tax savings than if they took the dependent care credit on their tax return. And, the employer will realize meaningful savings in FICA taxes that will typically more than offset the cost of providing the accounts.

Many small employers look at the potential cost of medical insurance and decide not to offer the plan to their employees not realizing that they still can provide a meaningful benefit by taking advantage of the tax code to set up these plans through payroll deduction. Ultimately, small businesses will find that their ability to grow their business and retain qualified employees will be hamstrung if they are unable to offer competitive benefits programs. Independent agents have a great revenue opportunity to focus on the benefit needs of their small business customers. And, of course there are other related benefit plans like disability, life insurance and long-term care that can be offered on a voluntary basis to these employers to round out their offerings.

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

Forms & Substance

If the BOP Fits, Don't Wear It

Some risks are not suited for a BOP, regardless of whether or not an insurer is willing to issue one. While BOPs can be ideally suited for many mainstream businesses, they aren’t for everyone.

The Big “I” Virtual University’s “Ask an Expert” recently received the following question involving a BOP:

“We have a question on a business owners policy form. Our insured is a boat dealer that the company has agreed to put on its BOP. We need to know if Exclusion G.2. would apply to a products/completed operations exposure. We are concerned that if the insured is working on repairing or servicing a watercraft, the completed operations, or its work, would be excluded on the BOP form. If there is some other place in the form the coverage would be excluded, I'd like to know that as well. This is the section that we noticed.”

It is very difficult to comment on BOP policies since most companies use their own proprietary forms (the above referenced BOP is not an ISO standard form number or edition date). Unless provided with an actual copy of the form, the best the VU faculty members can do is comment on the ISO-equivalent form. As it turns out, the referenced exclusion is identical to this one in the ISO BP 00 06 01 97 BOP related to autos, aircraft and watercraft.

One question that immediately comes to mind: Why would someone insure an insured involved in boat sales, servicing and repair under a policy that excludes the ownership, maintenance, operation and use of watercraft? Even so, under most conditions, this exclusion actually wouldn't apply, but there are other exclusionary candidates that do create problems. For example, a host of PD exclusions could apply.

For example, there is no coverage for this workmanship exposure regardless of whether or not it's a watercraft. While the property is in his “CCC,” there’s no coverage and, with regard to a completed operation, there's no coverage to “your work.” If they do engine work, and the engine later catches on fire due to their negligence and burns the boat, there’s no coverage for damage to the engine, but there would be for damage to the remainder of the boat. If they're "test driving" the boat before relinquishing control back to the owner (i.e., it's not yet a completed operation), then there's no coverage for damage.

The BOP is so limited in coverage options that there's no way to get around these huge coverage restrictions. As one VU faculty members put it, "It never ceases to amaze me what some underwriters will agree to put on a BOP. And it's accepted as if the price and business income are worth everything else that's given up. To me, this is one of those classes of business that needs a specialty policy. Would you use a BOP for an aircraft or auto dealer?"

This insured, among other things, needs a form of garage keepers coverage that is amended to bring "watercraft sales, service and storage" into the definition of "garage operations." The property coverage part will most likely exclude coverage on the insured's inventory if it is afloat. Will the insured participate in in-water boat shows? There may be a problem for floor plan watercraft.

Also be wary of exclusions or limitations to personal property (particularly watercraft) in the open. What about sea trials and the operation of watercraft? What about Protection and Indemnity coverage? Is there a 26 ft. vessel limitation to worry about since we do not know the size of the non-owned watercraft? A boat dealer's or marina operator's package would probably be in order. You also may have issues about the Longshoreman Act under the workers compensation, depending on what they do and where.

As someone once said, "The right to do something does not mean that doing it is right." This appears, at least on the surface, to be too complex and unique and exposure to fit a standard BOP. Just because the BOP appears to "fit" doesn't mean you have to wear it.

To read the entire article, click here.