T H U R S D A Y ,   M A Y   4 ,   2 0 0 6

 Big "I" National News

P & C   T R E N D S
T-Minus 27 Days to Hurricane Season

An ominous dark cloud is hovering over the insurance industry. With less than 30 days to go until the official kickoff of the 2006 hurricane season, insurers and agents can do little more than wait with bated breath to see what the coming months have in store.

In reaction to the last year’s devastating hurricanes, and in anticipation of gloomy predictions of a repeat hurricane performance in 2006, many insurance carriers are scaling back or pulling out of Florida, Louisiana and other coastal locations.

According to the front-page April 30 Washington Post article "Insurers Retreating From Coasts," seven of the all-time 12 most-expensive U.S. insured disasters occurred in the past two years.

"Companies are shedding homeowners policies and driving residents to taxpayer-funded state insurance plans," the article says. "Florida’s Citizens Property Insurance Corp., for example, has 815,000 policyholders and is adding 40,000 a month, said Kevin M. McCarty, state commissioner for the office of insurance regulation."

Insuring the country’s highly populated coastal areas was a hot topic last week during the Big "I" National Legislative Conference & Convention’s CEO Panel.

"In the very near term, you have to pick your risks very carefully," said Safeco Corporation President and CEO Paula Rosput Reynolds. "We’re trying to get a lot more selective at diversifying out of these areas…We’re on a several-year journey before companies like Safeco return to areas."

Ramani Ayer, chairman and CEO of the Hartford Financial Services Group, Inc., pointed out that coastal areas account for about 50% of the country’s population. He expects that number—and insurers’ exposure—to raise dramatically as many baby boomers start to retire and settle in Florida.

"The disaster-prone areas are tough to do," he said. "There is still rate suppression in Florida. Markets have to be free…We cannot continue to build. States like Florida have to be more permissive of using cat models."

Allstate Corporation, according to the Washing Post, stopped writing homeowners policies in Louisiana, Florida and coastal areas of Texas and New York in the wake of 2005’s hurricane season.

During the CEO Panel, Allstate Chairman and CEO Edward M. Liddy discussed a plan many in the industry favor: having the federal government adopt a natural disaster backstop similar to TRIA.

"We can’t take the risk of three or four Katrinas in one year; that would be devastating," Liddy said. "We favor regional pools with a federal backstop. We could then provide a lot more business. This is not an insurance bailout policy. There’s got to be a better way to do it. Preparation should be in advance."

"We don’t write coastal in Florida," said Michael Browne, president and CEO of Harleysville Insurance. "In the near term, companies are going to have to rely on their exposure management. Given the political climate today, it will be difficult to get Congress to step in to help with natural disasters."

Not all the CEOs endorsed the idea of federal involvement. "We think that as an industry, we should think long and hard before we invite the government into what we do," said Gary R. Gregg, president and CEO of Liberty Mutual Agency Markets. "We’ve been able to handle catastrophes for a very long time. We’re very concerned about the politicization of states at the federal level. I think we can work this out. Homewoners insurance has gone up 80% in Florida. We haven’t done enough on mitigation and building codes."

According to the Washington Post, experts are forecasting five Category 3 or higher storms in the 2006 Atlantic hurricane season.

Big "I" CEO Bob Rusbult, the panel’s moderator, closed the conversation by noting that independent agents are on the frontlines, and that they need markets. He then urged unity in handling this issue.

Jennifer Sikorski ( jennifer.sikorski@iiaba.net) is IA’s associate editor.

P & C   T R E N D S
CEOs Tackle Market, Federal Regulation, Investigations

It’s been a hectic couple of months for the insurance industry. Between the introduction on an OFC bill in Congress, TRIA renewal, ongoing regulatory investigations and settlements, continued concerns over 2005’s hurricane disasters and concerns over a hard vs. soft market, there is plenty to keep industry executives up at night.

These issues dominated conversations during the Big "I" National Legislative Conference & Convention, held last week in Washington, D.C. Friday’s CEO Panel gave top insurance carrier CEOs the opportunity to share their views:

On commercial lines…

"It’s too early to tell (where we are in the market). We’re in a soft market. Could get softer or firm up. I still believe, however, there’s an opportunity for companies to increase profits. This is a people business…"

—Michael Browne, president and CEO, Harleysville Insurance

"On the commercial lines side, in the first quarter, rates were flat to negative…There is downward pressure on margins in ’06."

—Gary R. Gregg, president and CEO, Liberty Mutual Agency Markets

"There’s so much capital in commercial markets that anyone can expect hardening in the long term. Efficiencies from technology drive the profit pattern."

—Paula Rosput Reynolds, president and CEO, Safeco Corporation

"Not hardening (in the near future), but loss cause are moderate in commercial lines. That is a good thing. The pricing of loss-cause spread in commercial lines has turned negative for us. But commercial lines will still stay very competitive and I don’t see that changing. You can’t ignore the fact that capital growth outpaces profit growth. When that happens, it can lead to stability."

—Ramani Ayer, chairman and CEO, The Hartford Financial Services Group, Inc.

On personal lines…

"Personal lines, I think, is in a very strong position right now. If you look at pricing and benefits of frequency and overall severity, things are inline. What do we need to do to protect and prepare homeowners if there’s another Katrina? The focus of the industry is on homeowners right now."

—Edward M. Liddy, chairman and CEO, The Allstate Corporation

On regulatory settlements’ impact on agents…

"We strongly believe there is absolutely nothing wrong with contingent commissions. There is no more competitive market in the United States than the one we’re in. The independent agent community can do a lot about it. If the independent agents continue to stay aggressive, to push back, they can go a long way to preserving the system." —Browne

"It calls unfortunately for legislative solutions at the state level. There are so many unanswered questions. You read various settlements…even a straight commission is contingent—it’s contingent on the sale. I think it’s going to be a bit murky for a while. " —Gregg

"What you call something has a lot to do with how it is perceived. It’s basically pay-for-performance. It’s very typical to what is used in other industries. I think Spitzer’s actions and the success of his actions will be duplicated by other states. It’s hard to ‘defend’ our industry because it’s not black and white; it’s about impressions." —Liddy

"When it comes to non-defensible actions like bid-rigging, as long as they exist, the investigations will be there. Imputing agencies’ behaviors on the companies (doesn’t make sense). You are independent; you can choose your companies. That’s one message we try to get out there to reps—that we don’t control you. Over the next four to 10 years, we’ll see more questions asked." —Ayer

On TRIA’s extension…

"During the last go-around, there was an effort in Congress to challenge the industry to assume a greater risk. Our job has begun again." —Ayer

"In terms of solvency, TRIA is always important. Every day, it doesn’t affect us as much (as a regional carrier). This is simply a risk in the private sector. It’s the equivalency of war. The federal government has to be a backstop." —Browne

"After 9/11, the passage of TRIA was essential. (What is) missing in TRIA is that it doesn’t cover any personal lines." —Liddy

On reforming insurance’s current regulatory system…

"The current system of state regulation is not effective because it’s so uneven. On the other hand, going to federal regulation could lead to something worse—more bureaucracy, more inflexibility, less understanding." —Browne

"We’ve been a strong supporter of state-based regulation. It does need to be standardized. There are two areas we need to be concerned about: pace of standardization and—one of the problems with not having some federal involvement—that there is very little knowledge of this industry (in Washington)." —Gregg

"The need for regulatory reform is strong. There is no single advocate for the industry. It’s time for another approach so we can bring more products for you. If we have an OFC, we will have more competition with the dual-regulation." —Ayer

"The current system is antiquated and broken." —Liddy

 V I E W :   P & C   T R E N D S
A Row Over ROE
What are the perceptions of the insurance industry’s profitability?

How is it that p-c insurers are regularly cited as having below-average returns to investors, yet p-c insurers regularly appear on lists of successful companies? The answer to that is it depends on how you "slice the data."

Robert Hartwig, Ph.D., CPCU, SVP and chief economist at the Insurance Information Institute, recently released his annual calendar year review for 2005. He notes that, once again, the p-c industry’s average return on equity (ROE) lags unfavorably behind general measures of business returns to investors. Hartwig says the industry’s return to insurance company owners is right about 10% while the broader measures of publicly traded companies are around 15%.

But wait—two weeks ago, IN&V reported in "Fortune 500: Insurers, Others Roar Ahead in Banner Year" that insurers were at the front of the pack with banking, oil and drug companies. How can this be?

This seeming conflict of data supporting the notion "insurance makes tons of dough" on one hand and "insurance is a lousy business" on the other is a recurring theme. The dichotomy comes from the use of averages and who is included in the averages. The composition of the average can make for potentially misleading figures. You can meaningfully color your argument based on which of the more than 2,000 p-c insurance companies are drawn for the sample.

Take a look at the table below. It is a simple summary of the past three year’s worth of ROE data for various p-c industry groups and companies as tabulated by A.M. Best Company. ROE, the standard for measuring stockholder value, is calculated by dividing after-tax profits by stockholder equity (a.k.a. "surplus" or "net worth" or total assets minus total liabilities). As you can see below, measures of average returns need to be evaluated for who is included in them.

*Source: A.M. Best Aggregates & Averages (Note: 2005 figures will become available in third quarter of 2006).

Why might this be an important piece of insurance wisdom in the coming months? Simply stated, our industry needs to effectively grapple with the average Joes’ insurance cost. If there is a perception that, in spite of last year’s record catastrophe losses, our industry is healthy and profitable, then we can expect a proactive regulatory environment that asks the industry to help out where insurance is not available and/or too expensive. Conversely, if our industry is perceived as below average in returns to investors, less can be expected from insurers in the inevitable changes coming to financing catastrophe losses.

An upcoming IN&V article will look at an example and reasons how the perception that our entire industry looks more like Progressive and less like the P-C Mutual Group can result in a lack of insurance supply for everyone.

Paul Buse ( paul.buse@iiaba.net) is a licensed agent and president of Big "I" Advantage, IIABA’s for-profit subsidiary.

O N   T H E   H I L L
Agriculture Appropriations Subcommittee Limits PRP Funding
Funding limitation needed in order to protect farmers, guarantee quality service.

The Big "I" won an important victory Wednesday when the House Agriculture Appropriations Subcommittee prohibited funding for Premium Reduction Plans (PRPs).

The provision prohibiting funding in 2007 and 2008 passed as part of the Fiscal Year 2007 Agriculture Appropriations bill, sponsored by Chairman Henry Bonilla (R-Texas).

The Big "I" last year secured defunding of PRPs via the Kingston-Boyd provision, effective on July 1, 2006, the start of the 2007 reinsurance year. That provision did not interfere with the 2006 reinsurance year, which ends June 30, 2006, thus guaranteeing that no farmers will have to worry about previously purchased coverage.

The Big "I" has sought the defunding of this program because of various issues with PRPs that are contrary to the best interest of consumers. The United States Department of Agriculture’s Risk Management Agency (RMA) has published an interim rule allowing providers to give rebates to their customers, a provision at odds with the laws of 48 states, an unprecedented departure from longstanding Federal Crop Insurance Program (FCIP) regulations prohibiting rebating.

"Rebating through PRPs would force insurance providers to focus on shortcuts rather than providing quality service for farmers," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "Such a fundamental shift from service-based competition would create a race to the bottom among insurance providers and creating sub-par service for farmers across America. Legislators in 48 states have enacted anti-rebating laws, and this should be respected, in regards to PRPs, at the federal level."

In addition to the inherent problem of cutting service, there is also the problem that the PRP rebating scheme allows for rebates to be offered to farmers in some states but not in others. The existing FCIP does not allow discrimination in favor of farmers in one state over farmers in another state, but the PRP scheme would violate that principle.

"PRPs would shortchange farmers in some states in order to pay rebates in other states," says John Prible, Big "I" assistant vice president of federal government affairs. "This creates an opportunity for discrimination that should be stopped cold. We are very pleased that the Agriculture Appropriations Subcommittee has kept this funding limitation in place, and we thank Chairman Bonilla for his work on this issue."

Cliston Brown ( cliston.brown@iiaba.net) is Big "I" director of public affairs.

F O R M S   &   S U B S T A N C E
If the BOP Fits, Don’t Wear It

The Virtual University "Ask an Expert" service recently received the following question regarding a business owner’s policy. The VU faculty first attempted to address the coverage issues from the standpoint of the BOP, but it became very clear that this risk was not suited for a BOP, regardless of whether or not the insurer was willing to issue one. While a BOP can be ideally suited for many mainstream businesses, it isn't for everyone.

Here is the question:

"We have a question on a business owner’s policy form. Our insured is a boat dealer that the company has agreed to put on their 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 their 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 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. 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." For example, if they do engine work and, due to negligence, the engine later catches on fire and destroys 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 a 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 garagekeepers coverage amended to bring "watercraft sales, service and storage" into the definition of "garage operations." The property coverage part most likely will 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 foot vessel limitation to worry about since we do not know the size of the nonowned 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 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 an exposure to fit a standard BOP. Just because the BOP appears to "fit" doesn't mean you have to wear it.

For more information, click here.

Bill Wilson ( bill.wilson@iiaba.net) is Big "I" director of the Virtual University.

A G E N C Y   M A N A G E M E N T
Four Ways to Motivate CSRs

Customers are more demanding than ever. Professionals are more difficult to hire and retain than ever. Splitting an atom might be easier than rallying an entire organization to "wow" customers. Yet, some organizations succeed. Four motivation strategies can help your organization succeed too…one professional at a time:

Get Excited
Ironically, as managers the first professional to motivate is ourselves. If we lack motivation, employees will lack motivation. Motivation occurs from the inside out. If we want to motivate someone, we have to communicate to their inside. Emotions communicate on a deep level from inside to inside. This is why one bad apple spoils the bunch. It’s also why one excited manager can mobilize a team to move mountains.

Dig Deep
Feigning excitement is impossible because people’s insides come equipped with an infallible phony-detection system that is always on and has an amazing range of reception. Are you genuinely excited about the work your team produces? Whether we manage rocket scientists or the custodial staff, we need to fall in love with our team’s contribution. A rah-rah attitude at the staff meeting and ho-hum attitude everywhere else will quickly be discovered.

Hire Motivated Professionals
It’s easier to hire motivated professionals than it is to motivate professionals. Experts assert, "Hire smart or manage tough." Do you believe that professionals exist who would revel in the kind of work your team produces? They do exist.

Measure
Are you keeping score? When two people are hitting tennis balls back and forth, how long does it take for one of them to suggest playing a real game? What happens to the level of play as soon as the game begins? Is your department perpetually warming up, hitting balls around? Or are you playing for real? Measure something, but make it relevant to your employees, customers and bottom line.

Institute Profit Sharing
Tie the measurement to a reward. An adage predicts, "What gets rewarded gets repeated." Robert Bosch, a German inventor and industrialist, said, "I don’t pay good wages because I make a lot of money. I make a lot of money because I pay good wages." If you want to motivate employees even more, reward the results you reap from measuring. Rewards add precision to measurement inspired motivation. If we want salespeople to simply make sales, we emphasize the first sales commission. If we want salespeople to create relationships and long-term accounts, we emphasize the backend retention/renewal commission.

To motivate employees, be an exemplar. Being an exemplar will enable you to attract and hire highly motivated employees. Focus employees’ energy through measurement and reward strategies. Then…listen for the "wows" to start coming in.

For more information, click here.

Mary Sandro ( www.ProEdgeSkills.com) speaks on effective presentations, exceptional customer service and innovative hiring techniques.