T H U R S D A Y ,  M A Y  7 ,  2 0 0 9 

 Big “I” National News

P&C Trends
CEO Panel Discusses Key Industry Issues
Panelists address economy, federal regulation during Big “I” Legislative Conference & Convention.

The economy and federal regulation took center stage last week at the Big “I” Legislative Conference & Convention as CEOs from four property-casualty companies discussed the insurance industry and its current challenges and opportunities.
 
The panel, which took place during the Big “I” Legislative Conference & Convention’s General Session, was moderated by Big “I” President & CEO Bob Rusbuldt and featured Bob Restrepo, chairman and CEO of State Auto; Glenn Renwick, president and CEO of Progressive; Mike McGavick, CEO of XL Capital and Ted Kelly, president and CEO of Liberty Mutual.

While the panelists acknowledge today’s difficult economic situation, they have different perspectives on remedying the crisis. Kelly lobbied for a hands-off approach to the recovery effort, adding that recovery will be slow with high inflation at the end.

“A significant amount of de-leveraging must happen,” he said. “Unfortunately, the federal government is causing investment to slow down, and the government must step back to allow the free market to come back again.”

All panelists cited inflation as a major issue facing the industry, and Renwick predicted the only solution will be more leverage. However, he warned against “overdosing” a sick economy with too much spending and regulation and called for simple solutions that “don’t impede the good guys.”

Renwick also advised agents to look hard at the stability of companies they are involved with, since the economy is creating a phenomenon where the market appears to be hardening because cash-strapped consumers are demanding lower prices.

“There is a very real valuation going on of all goods and services people are buying,” Renwick told agents. “A lot of customers are in the mindset of ‘how can I have better value,’ and you don’t want them to analyze that without you.”

When it came to Troubled Asset Relief Program (TARP) money for life insurers, Kelly stated TARP funding would be bad for the market and that “capitalism without failure is like religion without sin.” He also stated that he believes AIG made an “incomprehensible” mistake.

“The one risk AIG never considered was, what if they lost their own rating,” said Kelly. “That’s risk management we would do routinely on the property-casualty side.”

McGavick also expressed his disappointment in regulators who allowed the AIG situation to spin out of control and argued companies’ cooperation with regulators is intended to prevent just such a crisis.

“Solvency is one of main purposes of regulation,” he said. “Those of us in the p-c industry should be extremely proud of the way our industry has performed through this crisis. As I think about what we’re going through right now, I really think it’s critical for our voices to be firm and loud…don’t fix what works.”

Restrepo believes a systemic risk regulator is needed, but not necessarily for the p-c industry because the system has worked thus far.

“New products, the interconnectedness of the economy and what’s happened recently point out the fact that we have a gap in regulation,” said Restrepo. “I’m comfortable that (the p-c industry) has a structure that may be horribly inefficient at times but has worked.”

When presented with a choice between the current regulatory system and mandatory regulation, Restrepo chose the current system, which he referred to as “the devil we know.” The other panelists agreed, and Renwick noted that part of responsible regulation has to come from industry leaders.
 
“Some part of regulation has to work back on us,” he said. “Stop regulating things you can’t regulate, and put that attention to good structures and market conduct.”

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

  

P&C Trends
Predicting a Hard Market
The numbers provide a revealing forecast.

In response to last week’s Insurance News & Views article, “The Softest Market Ever," many readers asked whether it’s time to expect a change in industry pricing and the return of a hard market.

The soft market seems steeper and more prolonged than the two years of price declines indicates --- approximately 0.5% and 1.5% for 2006-2007 and 2007-2008, respectively. However, when discussing hard insurance markets, it is best to clarify precisely what is being talked about. Independent agents are already seeing increasing prices in selected areas like catastrophe exposed property, but selective hardening in one area of the market is not generally referred to as a true hard market. The definition often used for a hard market is when overall p-c industry premiums increase by at least 5% above the inflation rate (click here for a graphical depiction).
 
Let’s examine the classical economic factors that affect the prices of goods or services. That is, what is happening to the supply of insurance and what is happening to demand? 

This graph, layered over last week’s graphic of real per capita premiums (blue line) is an equivalent measure of real per capita policyholder’s surplus (PHS - green line). The red line indicates the industry’s loss ratio. These two measures clearly show a reduction in supply. PHS is required to backup each policy written and if PHS falls as the graph shows, the industry’s ability to supply coverage is reduced. Conversely, as the industry’s loss ratio increases, it tends to restrict supply as insurers are more cautious in taking on new policies.

On the other side of the industry pricing equation is the demand for insurance. Unfortunately this is not as easily measured. The industry is coming off a year of historic catastrophe losses with $26 billion in wide-spread losses in 2008---the fourth worst year ever. On its own, that number would seem to motivate buyers to purchase coverage out of fear of similar losses in the future. Offsetting the influence of catastrophe losses, however, is the historic decline in the economy which should curtail economic activity and reduce demand. Workers’ compensation, general liability and construction-related coverages like bonds are all tied to the overall economy.

So, you be the judge. Clearly there are supply challenges, and the question is whether demand will remain at levels close enough to the past to drive up prices due to the decrease in supply. This could signal a general market hardening in the near future.

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^SM and a licensed p-c agent.

  

On the Hill
Health Care Reform Debate Heats Up
Big “I” readies grassroots initiatives for health care reform debate.

With the health care reform debate in Congress quickly escalating, the Big “I” has readied its nationwide grassroots initiatives to counter potential efforts to eliminate the role of agents and brokers in the sale and delivery of health insurance.  

Health care reform legislation could have major implications on independent insurance agents as well as consumers. Any government effort to replace or supplant the private industry in the sale and delivery of health insurance will have disastrous effects on the health insurance marketplace. A recent survey of the Big “I” national membership indicated that 62% of member agencies sell health insurance, and health insurance products account for more than 14% of agencies’ revenues.

To put in perspective the danger the independent agency system faces, consider these recent comments by Nancy-Ann DeParle, counselor to President Barack Obama and director of the White House Office of Health Reform:

“A public plan is something that’s sponsored by the government, and therefore has very low or almost nonexistent administrative costs, compared to others. It doesn’t have the need to have brokers out selling; it wouldn’t have the need to have a lot of costs and profits, the way private plans would. So it has that advantage,” she said.

Independent insurance agents have earned a role as a trusted advisor in helping individuals and employers navigate the challenges of the market to find and implement the best coverage to meet their needs.

An agent’s role does not start and end with the sale. Agents provide a wealth of resources to their clients. These services are not a duplication of the efforts of other health care providers or insurance companies but are necessary to help consumers with the complexities of the system. Independent insurance agents help their clients understand the market, not the reverse. Any effort by the federal government to cut agents out of the process will cause great harm to consumers, who depend on independent agents to be their advocate in the marketplace. 

Your participation in the Big “I” grassroots effort is crucial. Only through our strength in numbers will we be able to preserve the independent agent’s role in the sale and delivery of health insurance that benefits so many consumers.

Joe Wall (joe.wall@iiaba.net) is Big “I” senior director of federal government affairs.

L&H Trends
Estate Tax In Sharper Focus
Be aware of current legislation to help clients avoid unnecessary taxes.

Ever since the 2001 Income Tax Act became law, there has been anxiety regarding the outlook for estate taxes. This is because the 2001 legislation passed with fewer than 60 votes in the Senate, triggering a 10-year “sunset” of the law’s provisions.

The Republican leadership at that time indicated they would work to repeal the “death tax” permanently. However, the attack on the World Trade Centers, the war in Iraq and Democratic gains in the House and Senate thwarted the permanent repeal of the estate tax.

Under the current Senate and administration, insurance agents and financial advisors have been looking for clues indicating the level of the estate tax exemption and the tax rate when the law sunsets in 2010. However, President Barack Obama has made it clear that he wants to freeze the current rules and not eliminate estate taxes in 2010. In fact, the Obama administration’s budget resolution, recently passed by Congress, would freeze the estate tax at the 2009 level, with a $3.5 million per individual exemption and a 45% maximum tax rate indexed for inflation.

Whether this development is good news or bad news depends on one’s vantage point. For people with larger estates who had hoped for the eventual repeal of the estate tax, it will be bad news as it means estate and gift taxes are here to stay. However, once the 2001 law sunsets, beginning in 2011, the estate exemption would only be $1 million per individual with a maximum tax rate of 55%. If the Obama administration proposal can be extrapolated into an exemption level and rate that will suffice during his administration, insurance agents are in a position to help their affluent clients with estate planning, and the goal of having adequate liquidity and the necessary funds to meet the estate tax obligation.

While it may seem that a $3.5 million exemption threshold per individual is fairly high and won’t impact many people, the reality is the estate taxes will ensnare more Americans than just the very wealthy. Without adding planning, life insurance proceeds can be included in a decedent’s estate. So, take an example of a small business owner with a $1 million dollar life insurance policy, a house worth $800,000 (jointly owned), a business interest worth $2 million and $1 million in his retirement account. Let’s assume he dies a year after his spouse and that his includable estate is $4.8 million. Subtracting the $3.5 million exemption leaves a taxable estate of $1.3 million which, at a 45% estate tax rate, creates a $585,000 federal estate tax liability. This example’s outcome is regrettable because with adequate time and planning, such as moving the life insurance policy to an irrevocable life insurance trust (ILIT) and using the applicable estate credit available upon the death of the first spouse, federal estate taxes could have been eliminated.

Now is the time for agents to contact their clients and seek new clients to discuss how to deal with the proposed estate tax limits. In order to eliminate the proceeds of a life insurance policy from the includable estate of the decedent, all incidents of ownership need to be removed and a three-year period must have passed. Networking with attorneys and accountants to discuss the proposed limits and how best to position a client’s estate is a strategic move that should occur now. And, if agency principals have a potential estate/perpetuation problem created by the proposed limits, they should take action to address the agency’s needs.

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


Tech Updates
Position Your Agency to Prosper
During tough times, successful agencies make the most of technology.

Independent agents certainly have a lot of challenges right now. They are dealing with a property-casualty market that is not growing. Many commercial lines clients have had to scale back or have closed their doors permanently and investments have taken a severe hit. Agents are also understandably concerned about whether they will continue to have a role in the health insurance market as national health care proposals are being developed.

During this time of challenge, it is easy to become fixated upon the problems and to overlook the huge opportunities that are staring agents in the face. The number of agencies who are continuing to grow even in this tough market continues to be impressive; some have even been able to double their premium volume with the same number of employees. How are they doing it?

A common thread among these agencies is a determined focus to take advantage of the new technologies available to enhance their productivity. This focus is driven by the agency principals and they are using the time and cost savings they achieve to build their sales power. These agency leaders understand that technology has finally improved to the point that it can deliver significant benefits far outweighing the costs, provided they fully utilize the technology’s capabilities. Carrier representatives are finding technology-savvy, disciplined agencies to be their best business partners and performers.

Consider this quote from Daniel Burrus, the author of the newsletter Technotrends, who is known for his forward thinking and ability to identify significant trends and opportunities:

“We are now at the dawn of a profound technology-driven transformation that will make the changes we have experienced over the past 25 years seem small and slow. We are about to transform how we sell, market, communicate, collaborate, innovate, watch TV, learn and as you might guess, much more. This is a once-in-a lifetime opportunity for you personally, and for your organization,” he said.

So how are these agencies using technology to enhance their productivity and how is it benefiting them? These agencies are moving to an electronic model as completely as they can, eliminating paper wherever possible. Their agency management systems provide the hub for their information, and their other systems, if needed, integrate with their management system as much as possible. These agencies are active in their user groups, taking advantage of the excellent classes and online services provided by these groups to help them get maximum benefit out of their systems. They also drive continued improvements in their software from their vendors through these user groups.

Productivity-minded agencies provide their servicing and processing employees with at least two monitors, and sometimes three. The additional monitors pay for themselves in added productivity in less than one year. The capability of their systems to generate automated letters to clients is used to the maximum extent possible. The objective is to automate processing wherever possible, so that employees can concentrate on more productive servicing and sales activities. Employees are trained on written procedures and workflows that are implemented consistently throughout the agency and compliance with the procedures are consistently monitored. As a result, the agency’s E&O exposures are reduced.

Agents who take advantage of available technologies realize this is absolutely the best time to be an independent agent, because of their unique ability to provide customers with choices; to engender trust; and to make changes to adjust to new market conditions and take advantage of new opportunities.

Editor’s note: This article is part one in a two-part series. Next week’s edition of Insurance News & Views will include more information on specific technologies to grow your agency.

For more on expanding your agency’s reach through Web 2.0 technology, read “Find Us on Facebook” in the May issue of IA magazine.

Jeff Yates (jeff.yates@iiaba.net) is executive director of the Agents Council for Technology (ACT).

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