..:: Insurance News & Views ::..

Safeco announced this week that it will pursue a direct sales strategy focused on consumers who want to purchase auto insurance without using an agent.

The announcement comes after Safeco revealed in March it was "exploring ways to supplement our preferred sales channel." According to president and COO Mike LaRocco, the company believes that it can "expand its reach to new customers while maintaining our primary focus on the independent agent channel."

Safeco’s two primary marketing target groups for its direct program will be auto insurance consumers who prefer buying online and those who want to buy over the phone directly from the insurance company. Direct marketing mailings will point consumers to either go to Safeco.com or call 1-800-4Safeco. Safeco has established a call center for customers who wish to buy over the phone. However, LaRocco says agents should not expect a huge direct marketing presence. "No one should expect a $600 million advertising campaign or a Hollywood spokesperson," he says.

As Safeco enters the direct selling arena, LaRocco says that five guiding principals will direct its distribution strategy:

· "We believe all consumers should have the opportunity to purchase a Safeco policy according to their buying preferences.

· We will continue supporting and appointing independent agents because many consumers value the choice and consultation independent agents offer.

· We will resolve distribution channel conflicts in favor of customer choice first, the agent second and Safeco third.

· We will continue to manage each segment of our business to profitability over the long term.

· We will give consumers the option of choosing an independent agent whenever they like. "

Watch for further updates on this announcement, including an interview with president and COO Mike LaRocco, in future issues of IN&V.

P R O D U C E R C O M P E N S A T I O N I S S U E U P D A T E
Spitzer, Blumenthal File Suit Against Liberty Mutual
Insurer vows to fight allegations.

On May 5, 2006, New York State Attorney General Eliot Spitzer filed a civil complaint in New York against Liberty Mutual Holding Company alleging various violations of the law. A lawsuit also was filed the same day by Connecticut Attorney General Richard Blumenthal for essentially the same alleged wrongdoing. These complaints are the latest in the series of lawsuits brought by New York, Connecticut and other states for purported illegal actions involving producer compensation.

The complaint includes claims that Liberty Mutual (and other insurers not named or sued in the complaint) unlawfully: 1) paid contingent commissions to producers to induce them to steer insurance business to the company; 2) tied the placement of reinsurance business to a commitment from a producer to steer business to the company; 3) colluded to "rig bids and submit false quotes to unwitting clients;" 4) engaged in other anticompetitive activities; and 5) induced producers to breach fiduciary duties they owed to their clients.

As to the first of these allegations that Liberty Mutual paid contingent commissions to producers to induce them to steer insurance business to the company, the complaint includes examples, such as a quote from a communication with Gallagher describing contingent commission as an "incentive . . . to encourage your agency to place an increased amount of profitable business with our company." Other examples refer to internal communications by various brokers designed to show "systematic efforts to steer business in response to these incentives" but do not include communications between Liberty Mutual and the brokers.

As to the second allegation that Liberty Mutual tied the placement of reinsurance business to a commitment from a producer to steer business to the company, the complaint describes a 2002 exchange between Aon and Liberty Mutual involving concerns by the company that Aon’s fee for certain reinsurance was too high and that it was considering using another producer for that business. According to the complaint, Aon offered to reduce its fee on the reinsurance business in order to retain that business, and then had the opportunity to recapture lost revenue from that based on volume or profitability of retail business placed with the company.

As to the third allegation that Liberty Mutual colluded to "rig bids and submit false quotes to unwitting clients" there are examples in the complaint that "Marsh would instruct other insurance companies to provide intentionally losing bids that were inferior to those provided by the favored insurer." The complaint alleges that not only did this mislead clients to believe that the favored bid was the best available, it also resulted in business being directed to the favored insurer on terms best for it and not best for the client. The complaint goes on to allege how Kevin Bott, a company assistant vice president in the excess casualty division, conducted this activity. In August 2005, Kevin Bott pled guilty to criminal charges of bid-rigging.

As to the fourth type of misconduct involving anticompetitive activities, the complaint alleges that the bid rigging allocated customers and raised premiums; was intended to or could have unreasonably restrained trade and injured competition by "limiting the number of insurers competing to sell insurance to persons seeking such insurance;" allocated the market; used inflated bids, prices and other terms to hide the lack of open and free competition; and that the actions described were "gross, wanton and willful… and involved a high degree of moral culpability."

As to the fifth allegation that Liberty Mutual induced producers to breach fiduciary duties they owe to their clients, there were no examples in the complaint of conduct supporting this claim.

In several places, the examples in the complaint offered to support the allegations about Liberty Mutual are about the activities of brokers, not Liberty Mutual. For instance, the complaint cites a September 2003 internal report at Willis that stated that "Marketing centers are reviewing contingent, bonus and override plans to maximize all agreements during the fourth quarter." (Complaint, Paragraph 18.) However, this is not tied in any way to claims that Liberty Mutual had any role in or influence on the internal strategies and activities of the broker. There also is a statement that the payment of "undisclosed kickbacks" has "caused many thousands to receive inferior coverage." (Complaint, Paragraph 3) but there were no examples in the complaint of any instance in which coverage for an insured provided by Liberty Mutual was alleged to be inferior.

The remedies sought in the complaint are for an injunction to restrain the conduct described in the complaint; return of all gains and payment of restitution and damages caused by the conduct described in the complaint; punitive damages; treble damages; plaintiff’s attorneys’ fees and costs; and other unspecified remedies to redress the alleged violations.

The complaint includes claims that Liberty Mutual unlawfully: 1) breached Connecticut antitrust law by engaging in a corrupt, unfair and anti-competitive conspiracy to submit or cause rigged bids and to fix and raise prices for insurance premiums in Connecticut and the United States; and 2) breached Connecticut unfair trade practices laws by misrepresenting bids as valid and competitive when they were not, paying and failing to disclose payments of contingent commissions to brokers to induce them to steer insurance business to the company, oppressive conduct in violation of public policy (by breaching fiduciary duties, misrepresenting the sale of insurance products, giving fraudulent quotes, making undisclosed payments to brokers, artificially inflating prices by folding in contingent commissions to premiums, conspiring to set prices higher than would exist in a free-market, engaging in commercial bribery and tortuously interfering with another’s business expectancy).

This complaint includes most of the same allegations and many of the same examples as were included in the New York complaint. In addition, it includes some statements that were not included in the New York complaint and that do not appear to be supported by any facts. For instance, it claims that the costs of contingent commission are passed on to customers in the form of higher premiums, however, there is nothing to show that the company did this. (Complaint, Paragraph 44) Since some of the specific statutes upon which the complaint was based vary from those in New York, there are other differences between the complaints, but the essence of the allegations is the same.

The complaint seeks different remedies for the different alleged wrongdoing, as follows: 1) for breach of Connecticut antitrust law, the remedies sought are of an injunction to restrain the violations described of state law, civil penalties of $250,000, attorneys fees, and other relief that the court determines to be appropriate; and 2) for breach of Connecticut unfair trade practices laws commissions, an injunction to restrain the violations described in the complaint, an accounting to determine the amount of improper contingent commission, improperly earned premiums and amount of inflated premiums charged by the company; a civil penalty of $5,000 for each willful violation of these state laws; restitution; return of all revenues, profits and gains achieved through the violations alleged, attorneys fees and costs, and other relief that the court determines to be appropriate.

Liberty Mutual issued a statement on May 5, 2006 in response to the allegations in the complaint. The statement references two former employees who violated the company’s standards of conduct for quotes, resulting in one leaving the company in 2001 and the other resigning in 2005 during the investigation.

The statement notes that the Company is disappointed by the filing of the lawsuits, and cooperated with the attorney general investigations for almost two years in an effort to "reach a reasonable consensual resolution." The statement describes the settlement demands as "excessive and unreasonable: both in terms of magnitude and in their demands that we change legitimate business practices in states outside their jurisdictions." Liberty Mutual concluded the statement by indicating that "it is in the best interest of our policyholders and employees that we vigorously defend these allegations and allow the judicial process to work."

The filing of these lawsuits started the formal process of proving the allegations in them to be true or false. Each side will have the opportunity to obtain and review evidence and assert its position through legal documents filed with the appropriate court. If the lawsuits are not resolved through agreement by the parties or dismissal, they will proceed to trial. Any speculation about the outcome, especially without access to all of the evidence and facts, is conjecture. The Big "I" will monitor the progress of both lawsuits and provide updates about key developments in them.

Incentive compensation is a legal and effective means of compensating sales professionals in every industry. Its use is widespread, with varying structures that account for profitability and productivity. From refrigerators to cars, and homes to business equipment, compensation that rewards a sales force for excellence is sound business practice. In the insurance industry, an agent or broker must invest substantial time to identify the insurance consumer’s wants and needs; understand the complex terms of policies available; assess the products available to seek and present choices about coverage, price, service and financial strength of carriers; and remain available to assist with questions and changes as needed. IIABA believes that the compensation structure, including contingent commission, is not the real problem—the problem is the alleged illegal activity to obtain that compensation, and IIABA supports the prosecution of such illegal activities.

The complaints and exhibits are available to Big "I" members on the Legal Advocacy page of www.independentagent.com under IIABA/Industry Information & News in the section called Litigation (and Related materials): Liberty Mutual.

Debra Perkins ( debra.perkins@iiaba.net) is Big "I" executive vice president and general counsel.

P R O D U C E R C O M P E N S A T I O N I S S U E U P D A T E
Hartford Settlement Limits Some Instances
of Contingent Commissions
What does the settlement mean for independent agents?

On May 10, 2006, an agreement was announced between The Hartford Financial Services Group, Inc. and Hartford Life, Inc. and the attorneys general of New York and Connecticut to resolve allegations of wrongdoing by the company in connection with the marketing, sale or placement of terminal and maturity funding single premium group annuity contracts ("Terminal/Maturity Funding Group Annuities") to pension plan sponsors. The allegations were included in separate complaints also filed on May 10, 2006 in New York and Connecticut, respectively, both of which the agreement settled.

The New York and Connecticut complaints are essentially the same. They allege that Hartford engaged in fraudulent business practices and was unjustly enriched in connection with the marketing, sale or placement of Terminal/Maturity Funding GroupAnnuity pension plan by: 1) participating in improper arrangements to steer business to Hartford; and 2) providing customers with false information about compensation paid to brokers of Terminal/Maturity Funding Group Annuities.

The steering allegations are supported by explanations of Expense Reimbursement Agreements ("ERAs") used between 1998 and 2004 by Hartford purportedly to reimburse brokers for expenses they incurred in placing Terminal/Maturity Funding Group Annuities or for services provided to the company. The complaints allege that Hartford’s ERAs really were intended to pay brokers to steer profitable business to Hartford and give the company "last looks" and inside insights on bids to offer it an advantage not available to competing carriers. The complaints further claim that ERAs "saddled the brokers with a conflict of interest" inducing the brokers "to breach their fiduciary duty and place the interests of The Hartford ahead of its clients’ interests." (Complaints, Paragraph 102)

The agreement to settle is limited in scope to Terminal/Maturity Funding Group Annuities for which "the pension plan customer is domiciled in the United States or its territories" or "the contract is principally associated with providing retirement benefits to residents of the United States or its territories." It was entered into without Hartford admitting or denying any claims in the complaints, and includes a provision reserving for Hartford the right to request modification of the agreement if compliance with any aspect of it "proves impracticable."

Hartford must pay $16,100,000 by May 19, 2006 into a fund to be paid to Hartford’s pension plan customers that purchased Terminal/Maturity Funding Group Annuities from Jan. 1, 1998 through Dec.31, 2004 through Brentwood Asset Advisors, LLC, USI Consulting Group, Dietrich & Associates, or BCG Terminal Funding Company. Customers will be eligible for payments under the fund if the customer’s broker had an ERA or other incentive agreement with Hartford based on production and 1) the sale resulted in a payment to the broker pursuant to the ERA or incentive plan; 2) an amount reflecting the ERA or incentive plan payment was added to the premium but not paid otherwise to broker; and 3) the sale counted toward the threshold to receive payment under the ERA or incentive plan. The agreement includes details about how the amount available to eligible customers will be calculated, notices required to Eligible Customers, reports required to the attorneys general, and permissible uses of amounts attributable to eligible customers who do not participate in the fund.

In addition, by May 19, 2006, Hartford must pay a fine of $1,950,000 to the state of New York and a penalty of $1,950,000 to the state of Connecticut.

The agreement includes a statement of apology from Hartford for use with eligible customers, which says:

The Hartford apologizes to our single premium group annuity pension plan customers for the conduct that led to the actions filed by the Connecticut and New York Attorneys General. It was wrong to withhold from our pension plan customers the full amount of compensation paid to brokers in connection with the placement of these annuities. As part of the settlements, The Hartford has agreed not to pay contingent compensation for single premium group annuities.

Starting within 60 days of the agreement, Hartford is required to make a written disclosure, prior to binding on all proposals, quotes, and applications for each Terminal/Maturity Funding Group Annuity, and on a cover page accompanying the contract, of all compensation (defined below) paid or to be paid to the producer relating to that customer’s Terminal/Maturity Funding Group Annuity and to obtain the customer’s written consent to the compensation in the disclosure. If the amount of compensation is not calculable immediately, Hartford’s written disclosure must include the material terms used to calculate the compensation, and Hartford must disclose all compensation paid or to be paid to the producer in connection with the Terminal/Maturity Funding Group Annuity at the end of the calendar year.

For the purpose of the agreement, compensation means "anything of material value given to a producer including, but not limited to, money, credits, loans, forgiveness of principal or interest, vacations, prizes, gifts or the payment of employee salaries or expenses, provided that compensation shall not mean customary, non-excessive meals and entertainment expenses."

Starting one month from the date of the agreement, Hartford must disclose on its Web site information about its policies and practices regarding compensation to inform sponsors of pension plans about the nature and range of compensation it pays producers for Terminal/Maturity Funding Group Annuities. The content of this disclosure must be approved in advance by the attorneys general.

5. Disclosures for Form 5500

Hartford is prohibited from offering or paying any compensation, directly or indirectly, to producers for soliciting bids for Terminal/Maturity Funding Group Annuities.

Hartford cannot pay any Contingent Compensation (as defined below) to producers in connection with the sale or placement of any Terminal/Maturity Funding Group Annuity from May 10, 2006 through May 10, 2009. Starting on May 11, 2009, the payment of contingent compensation on this business is subject to the requirements described below.

any compensation contingent upon any producer: (a) placing a particular number of contracts or policies or dollar value of premium with Hartford; (b) achieving a particular level of growth in the number of contracts or policies placed or dollar value of premium with Hartford; (c) meeting a particular rate of retention or renewal of contracts or policies in force with Hartford; (d) placing or keeping sufficient insurance business with Hartford to achieve a particular loss ratio or any other measure of profitability; (e) providing preferential treatment to Hartford in the placement process, including but not limited to giving last looks, first looks, rights of first refusal, competitive bidding information not otherwise given to other insurers, presenting Hartford’s competitors in the placement process in unfavorable terms or limiting the number of quotes sought from insurers for insurance placements; or (f) obtaining anything else of material value for Hartford.

The definition expressly excludes any Hartford exclusive or captive Producers for Terminal/Maturity Funding Group Annuities if they are "clearly and conspicuously Executive Summary of The Hartford Financial Services Group, Inc. and Hartford Life, Inc. Agreement May 11, 2006 Page 5 identified" as Hartford’s Terminal/Maturity Funding Group Annuities’ Producers in marketing materials.

Starting May 11, 2009, Hartford agreed that within 30 days of receipt of a notice from either attorney general that it has determined that: i) insurers not paying contingent compensation on Terminal/Maturity Funding Group Annuities (or a segment of that line) (including to direct writers and insurers employing only captive agents for that line (or segment); and ii) insurers with signed agreements with either attorney general with this restriction against paying contingent compensation for that line (or segment), together represent over 65% of the national gross written premiums in the Terminal/Maturity Funding Group Annuity insurance line (or segment) in the calendar year for which market share data is most recently available, Hartford must stop entering into or renewing Contingent Compensation agreements for the Terminal/Maturity Funding Group Annuity line (or segment), and starting on Jan. 1 of the next calendar year, stop paying contingent compensation for Terminal/Maturity Funding Group Annuity sales or placements and terminate all existing contingent compensation agreements for that business. The basis for the 65% market share calculation is information from the LIMRA International, the National Association of Insurance Commissioners, A.M. Best or another agreed upon source if needed data is unavailable from either of those. If the 65% market share drops below 60% in any subsequent calendar year, Hartford must notify the attorneys general of the change and may pay contingent compensation if the attorneys general do not object within 60 days to Hartford’s determination that the market share is below 60%. If the attorneys general object and the matter remains disputed, it can be resolved by court action.

Starting May 11, 2009, prior to entering into any agreement to pay contingent compensation for the Terminal/Maturity Funding Group Annuity line (or a segment of it), Hartford must give the attorneys general written notice and a copy of the proposed agreement at least 60 days before execution of the agreement.

Hartford must implement written standards of conduct relative to compensation paid to Producers consistent with the terms of the agreement, subject to approval of the attorneys general. Those standards of conduct are required to include training in business ethics, professional obligations, conflicts of interest, antitrust and trade practices compliance, and record keeping.

The agreement requires Hartford to "support legislation and regulations to abolish Contingent Compensation for group annuity products, including 401(k), 403(b), and 457 group annuities, and terminal and maturity funding group annuities" and "requiring greater disclosure of compensation."

Hartford committed to cooperate with the Attorneys General relative to their Investigations regarding any person or entity (including former employees) concerning the insurance industry.

Although the agreement was entered into only by the attorneys general for the states of New York and Connecticut, it is expressly applicable to Terminal/Maturity Funding Group Annuities for all pension plan customers domiciled in the United States or its territories or where the contract is principally associated with providing retirement benefits to residents of the United States or its territories. As a result, producers engaged in the marketing, sale or placement of Hartford’s Terminal/Maturity Funding Group Annuities for the Company in the United States and its territories will want to be familiar with the disclosure notice and information on the website as well as the other terms of the agreement.

It is noteworthy that many of the business terms of this agreement are essentially the same as or very similar to the terms in prior settlements entered into by other insurance companies with the attorneys general of New York, Connecticut and other states. Specifically, other settlements required use of a disclosure notice, posting information on the company Web site about producer compensation, a ban on the payment of contingent commission for a specified time period and restrictions on its use after that based on various conditions relating to the market share of insurers not paying it, implementation of standards of conduct, a duty to cooperate with investigations by attorneys general and an agreement to support legislation and regulations to abolish contingent compensation. Whether all future settlements will include the same or similar terms is unknown but these terms appear to resonate with the attorneys general and thus may be an indication of what to expect if and when other settlements are reached.

The complaints and agreement are available to IIABA members on the Legal Advocacy page of www.independentagent.com under IIABA/Industry Information & News in the section called Litigation (and Related Materials): The Hartford Financial Services Group, Inc. and Hartford Life, Inc.

Debra Perkins ( debra.perkins@iiaba.net) is Big "I" executive vice president and general counsel.

V I E W : P & C T R E N D S
Insurance Supply: Is that H03 Like Gas for a
“Deuce and a Quarter?”

There is a debate in nearly every state with coasts warmed by Gulf waters about the lack of homeowners and small business insurance availability due to hurricane exposure.

Let me start by saying, I’m just an insurance agent like you, and I am not involved in policy positions at the state or national associations, so consider the source of this missive not necessarily exclusive of the Big "I" position, but at least independent of it…an opinion like yours. With that caveat, my comment is that what I see debated with renewed vigor on rate regulation in the insurance business is troubling. I hope local elected officials consider what most introductory economics classes teach about price ceilings and their unintended consequences.

The chart above shows a classic supply vs. demand graph (the supply line soars and demand goes down). The green line represents government regulation that establishes a price ceiling at a relative measure in this situation of "3." You do not have to be Milton Friedman or from the Austrian School of Economics to know that the classical economic theory’s immediate prediction is that suppliers will be willing to provide a relative quantity of "3" at a price of "3," while the market will demand a quantity of "7." The difference of "4" is a shortage. The theory goes on to say that if the price were able to increase to "5," all would be in balance with supply equaling demand in the market.

There are many examples of failed regulation strategies of price ceilings. Notable examples are dilapidated buildings in areas of affluence due to rent controls, cow milk poured in ditches as price controls make it unprofitable to ship and, my favorite, the lines at filling stations during 1970s. As an avid biker, I made my way past idled petrol beasts like the 1977 Buick Electra 225 (yes, the "Deuce and a Quarter").

So, what would your Economics 101 teacher hope you remembered from class if you applied it to insurance and pondered the possible unintended consequences of increased price controls ("ceilings")?

· Shortages: The most obvious outcome of any price ceiling is a likely supply shortage.

· Misallocation of Resources: Insurance is a business of allocation of dollars to lines business. Generally, for every $2 of written premium, an insurer somewhere is holding $1 of capital on its balance sheet as net worth or surplus. If prices are held down and insurers feel a line of business will not generate the returns on that capital, other lines of business will get to use that capital. And, if the insurer can not find other businesses, the insurer will send the capital back to stockholders or to other businesses further restricting supply and exacerbating the shortage.

· Hampered innovation: It is said every market problem will find its own solution given time. On the other hand, if price ceilings make the business unattractive, the brightest minds will work on other things…slowing innovation. I would wager implementation of improved building techniques and better building codes will most quickly come where private enterprise through insurance is there to reward such behavior.

· Harmful innovation: Need I say more than "tie-in sales." I’ll get you that insurance if you (you name it here).

· Black markets: Price ceilings go hand in hand with black markets when the in-demand product is provided at an unregulated but higher price. This is not a traditional issue with insurance, but given enough pent up demand and access to the Internet, I can imagine the law of unintended consequences coming up with some creative and likely harmful solutions.

I do not want to convey an over simplification of the situations as there are many factors at play and insurance is commerce very difference than, say, the study of bread supplies in the Soviet Union. I do believe the above forces are undeniable and anyone considering approaches to "manage" the insurance economy should not forget they can not control all the unintended consequences.

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

What do independent agents and Aesop’s fables have to do about Social Security and Medicare?

The Aesop of legendary fable fame lived during sixth century B.C. His simple lessons apply to all facets of life. However, the fable "The Grasshopper and the Ant" comes to mind in light of a report released last week by the Social Security and Medicare Trustees. In its 2006 Annual Report to Congress, the Social Security Trustees announced:

· The projected point at which tax revenues will fall below program costs comes in 2017, the same estimate as last year’s report.

· The projected point at which the trust funds will be exhausted comes in 2040, one year earlier than last year’s report projected.

· The projected actuarial deficit over the 75-year long-range period is 2.02% of taxable payroll, which up .09% from last year’s report.

· Over the 75-year period, the trust funds require additional revenue equivalent to $4.6 trillion in today’s dollars to pay all scheduled benefits. This unfunded obligation is $600 billion higher than the amount estimated last year.

The Medicare trustees indicated that the long-term growth rates were not "sustainable under current financing arrangements." Total Medicare expenditures are estimated to be 3.2% of gross domestic product (GDP) in 2006, reaching 11.0% in 2080. In addition, the retirement and aging of the "baby boom" generation also will increase expenditure growth rates for Medicare.

Taking both reports into account, it’s clear that the two government programs will be stressed. The eventual remedies that will be considered include: postponing the date that benefits will commence; "means testing" of recipients; increasing in payroll taxes; and any other available steps.

While no one knows for sure what will happen eventually, the fable "The Grasshopper and the Ant"---in which the Ant busily scurries about gathering food for the winter while the Grasshopper does not see the urgency in making preparations---reminds us that time is fleeting and meeting important needs need long term planning. Given the complexities of saving for retirement, most people need help from someone that they trust. Independent agents are in a unique position to help Main Street Americans plan and execute on their retirement strategy.

Let’s go back to the fable. Most people interpret the Grasshopper’s actions or inactions as a result of laziness. Maybe there is another reason: lack of knowledge. Perhaps the Grasshopper didn’t really understand that winter was approaching and/or underestimated the amount of food that he would need to get through the winter.

Independent agents are educators and implementers. That is an important distinction. Many consumer pundits lampoon insurance agents, but the reality is that until a policy is bound, no transaction is actually consummated. Even equipped with the best information, many people are procrastinators and need a push to do the right thing. That is why dentist offices regularly schedule check-ups. They realize most people will postpone having regular checkups until they run into a dental problem.

Many people assume that the government will be there to take care of their needs. However, the trend is for Congress to provide tax incentives to encourage retirement savings through IRAs and retirement plans. The new Health Savings Accounts also serve as a vehicle to accumulate funds to help pay for retiree medical insurance costs. More than ever, Americans will need to be as self-reliant as possible. Independent agents can assist them with their responsibilities.

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

O N T H E H I L L
Congressional Committee Retains PRP Limit
Provision prohibits funding for Premium Reduction Plans.

The Big "I" praised the House Appropriations Committee this week for retaining an important provision to maintain a viable crop insurance program for family farms. The committee, in a full markup, signed off on the prohibition of Premium Reduction Plan (PRP) funding in the Fiscal Year 2007 Agriculture Appropriations bill, sponsored by Chairman Henry Bonilla (R-Texas).

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.

"We realize there are still many more steps before this legislation is enacted, but we are very pleased that the subcommittee and the committee that are closest to this issue recognize the funding moratorium should remain in place," said Robert Fulwider, Big "I" national Executive Committee officer, principal and president of the Ray Wuestenberg Agency Inc. in West Liberty, Iowa, and principal and president of the Fulwider Agency Inc. in West Branch, Iowa. "We are also pleased that this legislation provides a two-year timeframe which will allow the Risk Management Agency the time it needs to develop a more equitable discount program for farmers who utilize crop insurance in their financial planning."

"We are very pleased to see this much-needed provision in the final version of the House bill," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "Rebating through PRPs is a horrible idea, because the end result is that insurance providers would need to focus on shortcuts rather than providing quality service for farmers. We thank Chairman Bonilla and the full committee for its support and its vote on this important issue."

In addition to the inherent problem of cutting service to farmers, 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.

"Crop insurance is a very labor intensive and complex product, with many variations and options for farmers," says John Prible, Big "I" assistant vice president of federal government affairs. "The PRP would shortchange farmers of needed and valued advice and counsel. The committee has done the right thing, and we will continue to work to ensure that the integrity of this program is maintained."