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Big “I” National News

P&C Trends
Stunted Growth
Forecast predicts agencies will be short on growth.

Rate changes in the property-casualty market have drastically affected revenue growth in the sector and the struggling economy is likely to take an even greater toll on agency growth as conditions worsen, according to Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast.

Economic growth is expected to slow to between 1.3% and 2% in the next year, down from original projections of 1.8% to 2.5%. And while the industry is accustomed to soft rates, their presence coupled with the weakening economy could mean slower growth in commercial businesses, which will eventually affect revenue generated from p-c lines, according to Marsh-Berry.

A large part of agency value is dictated by the ability to demonstrate sustainable and consistent growth, yet that has been a challenge for many in the last four years as the market softened. Since most agencies’ revenues are largely comprised of commission income and contingent income, many agencies that have not dialed down executive and producer accountability and differentiation strategies are now incapable of writing enough new business to offset the softening, Marsh-Berry says.

Marsh-Berry attributes the brunt of the economic woes, especially the housing market’s downward spiral, to the Federal Reserve, which it says failed to demonstrate “stability and proactive decision making” when the economy started struggling.

“The Federal Reserve instead opted not to reduce the federal funds borrowing rate in August of 2007. That decision was then followed up by cuts in September, October, December and three quarters of a point in January of 2008, the largest single cut in over two decades,” Marsh-Berry says. “Then the rate was cut again just eight days later ‘in view of a weakening of the economic outlook and increasing downside risks to growth.’ March of 2007 saw yet another 75 basis point cut, bringing the federal funds rate down to 2.25% from a high of 5.25% in August of 2007.”

These rate cuts did little to improve the situation for agencies and Marsh-Berry says it’s now up to agents and brokers to pick up the slack or deal with the repercussions.

“Lower profit simply means lower value. No matter how you slice it, margins are coming down for most agencies and as a result, so is value, regardless of the EBITDA multiple,” the company says. “Profit margins are in jeopardy and expense management is not the solution to sustainable earnings growth. Continuous new business production is key and it will never happen unless it is planned, funded and executed.”

*Editor’s Note: This is the third and final article in a series covering projections from Marsh-Berry’s 2008 Insurance Agency/Broker Value Forecast.

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




On the Hill
Flood Insurance Bill Passes U.S. Senate
Legislation would enact a much needed five-year extension of the NFIP.

The U.S. Senate passed the Flood Insurance Reform and Modernization (FIRM) Act on Tuesday by a vote of 92 to 6. The FIRM Act, introduced by Chairman Christopher Dodd (D-Conn.) and Ranking Member Sen. Richard Shelby (R-Ala.) would help modernize and reform the National Flood Insurance Program (NFIP). It would also reauthorize the program through 2013, and contains a provision that forgives the Federal Emergency Management Agency’s (FEMA) $20 billion debt to the U.S. Treasury.

A different version of the FIRM Act passed in the U.S. House of Representatives last year and now the Senate and House must resolve the differences between the two versions before sending the FIRM Act to the President for his signature. The FIRM Act is considered a “must” item in Congress this summer since the NFIP is set to expire on Sept. 31. However, now that both the House and Senate have passed versions of the FIRM Act, it is more likely that the program will be reauthorized for an additional five years before it expires. 

In addition to the five-year program extension, the Senate-passed FIRM Act has a number of policy reforms which the Big “I” strongly supports. Chief among them is a provision that would forgive the debt that the NFIP incurred as a result of the devastating 2005 hurricane season. Right now the program is almost $20 billion in debt from that season, and the forgiveness of this debt is crucial to the future financial security of the program. Additionally, the FIRM Act includes a provision that would remove the subsidies for second homes, which will help put the program on a path toward actuarial soundness. 

A number of amendments were debated during the Senate’s consideration of the bill.  The most controversial amendment, offered by Senator Roger Wicker (R-Miss.), would have added windstorm coverage to the NFIP. This amendment was strongly opposed by insurance companies, environmental groups and consumer groups, and was defeated by a vote of 19-73. Unfortunately, an amendment that would have increased the maximum coverage limits for the program for the first time since 1992 was also defeated.

The Senate-passed FIRM Act also includes a provision that would create a Commission on Natural Catastrophe Risk Management and Insurance, a bipartisan group that would examine natural disaster risks and report back to Congress with recommended solutions. As the conduit between consumers and insurance companies, the Big “I” has long advocated that Congress develop a national solution to this national problem and sees the commission created by this legislation as a critical first step toward that goal.

The House and Senate must now resolve the differences between the two versions of the FIRM Act before the legislation can be sent to the President. During these negotiations, the Big “I” is hopeful that Congress will seriously consider including needed modernizations to the program in the final bill. Provisions to increase the maximum coverage limits and to include optional coverages such as business interruption coverage and additional living expenses are especially important to independent agents. An increase in coverage limits would enable consumers to better insure against losses due to flooding while the inclusion of additional living expenses and business interruption would help consumers who are hurt by flooding to overcome the uncertainty often experienced immediately after these events.

With the 2008 hurricane season beginning on June 1, the Big “I” will be lobbying the House and Senate aggressively to quickly resolve their differences in enacting a final FIRM Act into law. Millions of consumers are dependent on this government program for protection from the damage associated with flooding, and the long-term viability of the NFIP is dependent upon both the reform and reauthorization of this critical program.

John Prible (john.prible@iiaba.net) is Big “I” assistant vice president of federal government affairs.




L&H Trends
Learning from Disasters
Independent agents can help educate customers on their disaster exposure.

The recent tragedies in China and Myanmar have been truly devastating. The massive earthquake in the Sichuan province measured 7.9 on the Richter scale and resulted in evacuations in office buildings in Beijing and Shanghai. In Myanmar, the death toll from the cyclone may exceed 100,000 and food and medicine is needed to ward off disease and starvation for as many as two million displaced people. Yet the Myanmar government’s posture on accepting aid from outside nations and non-governmental organizations has greatly crippled the ability to get necessary supplies on the ground.  

For many people watching and reading about the devastation, there is probably some rationalization that these disasters are amplified by the lack of resources, logistical considerations, poor building codes and communication infrastructure of these nations, and that a disaster of this scale could not occur in the United States. However, the United States has certainly had its share of disasters, particularly hurricanes in the densely populated gulf region. Hurricane Katrina and the resulting problems that occurred in New Orleans have been well documented. There have also been earthquakes in recent years that have caused significant damage, but fortunately not the widespread carnage that China is experiencing.

Independent insurance agencies are well positioned to help their customers deal with the exposures such as earthquakes, floods and fire for their homes and businesses. Of course, not every homeowner is convinced of the need for flood insurance and there just a small percentage of eligible homeowners who actually purchase earthquake insurance. Property-casualty insurance can help deal with those financial threats to a homeowner or business owner. However, what if someone is injured and becomes disabled from a natural disaster? Or, is killed? The reality is that other than Social Security benefits for survivors and qualifying widows/widowers, there is no other financial safety net. An independent agent is uniquely able to assist their customers with dealing with threats to their valuable tangible assets and also to ensure a future stream of income in the event of death or disability. Regardless of whether the peril is a natural disaster, a car accident or disease, an independent insurance agent can bring peace of mind that the family’s needs and objectives will still be accomplished.  

Using the natural disaster example is one way of explaining the various perils that customers face. Unfortunately, many people in the U.S. erroneously assume that the government has a safety net that will take care of people affected by disasters. The reality is that for a young married couple without children (or for a couple in their 50’s whose kids are out of the house), if the husband is killed by a falling tree from a severe storm, Social Security will pay the widow a grand total of $255. Many Americans do not realize they do not automatically qualify for Social Security disability benefits. In fact, there are minimum numbers of “quarters” worked needed to satisfy eligibility for Social Security benefits. And, younger people are several times as likely to get disabled as they are to die, so the exposure is very real.

Independent insurance agents should spend time with their customers to explain these various perils and how insurance can transfer risk to a third party. You will be helping them, your agency and the economy at large by ensuring that they are well protected.

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




P&C Trends
Bringing in the Bucks
Selling insurance boosted banks’ profits in 2007.

Banks that sold insurance in 2007 were more profitable than those that didn’t, according to the Mamaroneck, N.Y.-based Bank Insurance Market Research Group.

By examining FDIC call report data, the research group found that banks selling some insurance products had 44% higher (median) net income last year when compared to banks not offering coverage.

“We’ve never really seen this type of connection between banks’ net income and insurance. I only happened on it because I was looking at one size income and decided to look at all the others,” says Andrew Singer, managing director of the Banks Insurance Market Research Group.

The trend spans all asset-size groups from banks with $10 billion or more to those with less than $250 million. Last year, the median net income at the 7,787 operating banks and savings banks the research group looked at was $1,071,000. However, the median at the 3,596 banks and savings banks with some insurance activity was $1,543,000.

“The data suggests that pursing a diversification strategy --- of which insurance brokerage is often a key part --- may have paid off banks in 2007,” Singer says. “Particularly at a time when banks’ traditional income sources are under pressure. An insurance agency business can help smooth out earnings and act as a hedge against interest-rate volatility.”

While Singer says he cannot pinpoint exactly why some banks venture into insurance and others do not, he believes most are driven by a desire to boost revenues.

“Some people buy agencies just because it’s a good business…forget fee income and diversifying, they think they can make more money doing it. Although that was not a great argument in 2007 given the soft market,” he says.

Editor’s Note: Insurance News & Views will have more about banks in insurance this October when the Bank Insurance Market Research Group publishes its annual “Who’s Who in Bank Insurance,” an in-depth look at the top 100 banks in the industry.

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




Agency Management
The Agenda Question
Maximize meetings with clients and prospects by asking what they plan to discuss.

After six phone calls, the salesperson finally reached his client. The newly-assigned salesperson was relieved because for the past six months, this client had spent $90,000 a month with his company.

Within five minutes of arriving at the meeting, the salesperson learned that one of the three products his company provided to the client, the one that made up most of the client’s monthly budget, was not fully performing. Moreover, he learned a top competitor had gotten in to see his client and was offering an alternative solution. A proposal from the competitor would be in the client’s hands later that day.

The salesperson took lots of notes and ended the meeting by agreeing to do an analysis and bring a recommendation to the client the next day.

On the positive side of this scenario, the salesperson was persistent and managed to finally get an appointment with his client. And when he got there he identified the problem and uncovered the competitive risk. But what he didn’t do during the appointment phone call was ask an agenda question. An agenda question is the question to ask once you secure a date and time to meet with a prospect. 

Because the salesperson hadn’t asked an agenda question, he got blindsided by a serious problem and he was not prepared to begin to address it. This miss gave his competitor a time advantage.

Once a prospect agrees to meet with you, while it is important not to let the phone call go so far as to substitute for the meeting (i.e., don’t talk yourself out of the meeting), it is very important to ask an agenda question so you can  prepare for the appointment.

For example, by asking, “So I can be as prepared as possible, what topics would you like me to focus on?” or “What are the priorities that you would like me to think about in advance of our meeting?” you can maximize any meeting — especially a first one! 

At best, without the agenda question, many hard-earned first calls (and other calls) become “I’ll get back to you” meetings versus calls that keep the momentum going.  During a first meeting, of course you must ask lots of questions, but if you don’t begin to show you can add value, you may not get a second call. 

Agenda questions help to accelerate the sales process. Place a post-it with “agenda question” on your phone for one week and see how much more focused and productive first and other client meetings are.

To read this and other sales articles online, click here. 

Linda Richardson (www.richardson.com) is the founder and chairman of Richardson, a global sales training business.