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P & C T R E N D S
Renters Not Buying: 25 Million Americans Lack Proper Insurance Coverage

Almost 25 million U.S. families renting homes do not have adequate insurance coverage, leaving themselves vulnerable to serious property and liability losses. A new Trusted Choice® -sponsored study finds that the majority of U.S. renters are not aware of or do not understand the property and liability risks they face without insurance.

The study finds that 67% of U.S. families that rent lack coverage. Among respondents who said they don’t have renters’ insurance, 26% feel that the coverage is too expensive and another 17% said they didn’t know they needed it. Moreover, another 8% have never heard of renters’ insurance. Renters sometimes mistakenly believe they’re covered under their landlord’s insurance policy following a loss or claim.

· Do they own valuable, high-tech equipment? Most likely, they do. Eighty-nine percent of all renters own one or more valuable electronic devices, such as digital recorder devices, desktop and laptop computers, digital and video cameras and home theater systems. More than half of renters own exercise and/or sports equipment such as a bicycle, exercise equipment or skis.

· Do they own a pet? Half of all renters do, and these tenants face increased liability exposure, especially with dogs or exotic pets. But surprisingly, renters with pets are less likely to be insured.

· Do they run a business out of their rented home? If so, renters’ insurance isn’t the only protection they need. They probably should have a separate business policy.

· Do they have a college student in the family? College students heading to school this fall could be putting their families at risk. While homeowners’ coverage typically extends to students living in campus dormitories, coverage applications for off-campus housing are vague. Often, a separate renters’ insurance policy is the best bet for the risks students and their families assume with an off-campus rental.

· Do they live in a flood zone? If so, they need to purchase a separate flood insurance policy for the contents of their home. The NFIP has policies available specifically for renters.

ICR, an independent research company, conducted the omnibus survey for Trusted Choice^® via telephone. Interviews were conducted May 5 through 18, 2006 among a nationally representative sample of 2,030 adults (defined as 18 years of age and older). The margin of error is +/- 2.2 percentage points at the 95% confidence level. Among renters only, the margin of error is +/-5.2 percentage points. For more information about ICR, click here .

During the past three years, state policymakers across the country have quietly considered legislation that would establish a new interstate commission to handle the regulatory filing and review of life insurance and related products. The behind-the-scenes efforts have not always generated headlines, but the result of that hard work is perhaps the most significant insurance regulatory news in recent years---and proponents of insurance regulatory reform have a reason to be excited.

The National Association of Insurance Commissioners (NAIC) completed work in June 2003 on a proposal designed to streamline the regulatory process and provide life companies with a much-coveted single filing point for products. Specifically, the NAIC called for the creation of an interstate compact for handling filing, reviewing and approving life insurance, annuity, disability income and long-term care products and certain advertisements. Interstate compacts are multi-state agreements that allow the participating states to cooperate on regional and national issues while retaining state control. In order to establish interstate compacts, state legislatures typically must adopt identical authorizing bills, and the NAIC text has served as the blueprint.

The new interstate commission’s creation is a major victory for proponents of state insurance regulation. The compact addresses one of state insurance regulation’s failings, the duplicative and excessive regulation of life insurance and related products. The "plain vanilla" nature of these products and the virtual irrelevance of geography in their design and operation made them an especially ripe target for reform, and many within the industry are hopeful that the NAIC and state officials will make similar progress now in other areas of state regulation.

The NAIC proposal – which the National Conference of Insurance Legislators and the National Conference of State Legislatures endorse – required the enactment of 26 states before the compact became operational. Recent activity brings the total to 27 jurisdictions, and proponents expect that number to continue to rise. Less than 90% of the approximately 200 interstate compacts in place today have more than 25 member states, making the rapid success of this proposal particularly impressive.

Now that it is officially operational, the participating states will create the new commission---the Interstate Insurance Product Regulation Commission---that will exercise rulemaking authority and develop standards for the four covered product lines. The decisions of this entity will have the force of law in the states that approved the compact.

The commission’s first meeting will take place in less than three weeks, and the new body will quickly begin considering the many issues associated with getting the enterprise off the ground. The commission will discuss items such as forming its initial Management Committee (which will oversee day-to-day operations), staffing and technology requirements, the development of a budget and the approval of bylaws. Fortunately, NAIC and state regulators have been discussing these issues for months, with an expectation that the requisite number of states would act, and much of the initial startup conversation is well underway.

The states that have approved the compact so far are Alaska, Colorado, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico, Rhode Island, Texas, Utah, Vermont, Virginia, Washington, West Virginia and Wyoming.

Wes Bissett (wes.bissett@iiaba.net) is Big "I" senior vice president, government affairs and state relations.

C A R R I E R N E W S
Progressive Makes Management Moves
Changes include a new Drive president, resignation of the direct group president.

Progressive’s independent agent channel has a new name at the top. John A. Barbagallo, who joined the company more than 20 years ago as a claims representative, has been named the new president of the Drive Group of Insurance Companies. He most recently served as the Drive Atlantic region general manager. Barbagallo replaces Bob Williams who announced in March he would resign effective May 7.

The company also announced two other changes as part of an executive team reorganization: Brian A. Silva, currently general manager of the company's commercial auto group, reporting to the Drive group president, has been promoted to commercial group president. Alan R. Bauer, president of the company's direct group of insurance companies since 2002, stepped down from his responsibilities effective earlier this week. The company said there will be an internal search for the next direct group president.

The Big "I" praised the U.S. House of Representatives for passing the 2007 Agriculture Appropriations bill, which includes an important provision to maintain a viable crop insurance program for family farms. The House signed off on the prohibition of Premium Reduction Plan (PRP) funding in passing the bill, sponsored by Chairman Henry Bonilla (R-Texas), late Tuesday night.

With a grassroots effort that reached almost every House office, the Big "I" led the charge against a late amendment to the bill that would have, in effect, nullified the PRP prohibition in the legislation. At the last minute, the amendment was withdrawn, and the PRP funding limitation remained in place upon final passage.

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.

"This is great news, and we are very pleased that the House passed this legislation keeping the funding moratorium in place," says 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. "It is important that this bill 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."

"It’s terrific to see this crucial language for farmers and our members take another step forward," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "Rebating through PRPs is a terrible idea that would lead insurance providers to focus on shortcuts rather than providing quality service for farmers. We thank Chairman Bonilla and his colleagues in the House for passing this bill. We also appreciate the hard work of Congressman Mike Conaway (R-Texas) and many others, who along with Chairman Bonilla were instrumental in blocking the PRP amendment."

In addition to the inherent problem of cutting service to farmers, the PRP rebating scheme allows 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 provides a plethora of complicated options to farmers, and the PRP program would deprive farmers of the advice they need to navigate this complex system," says John Prible, Big "I" assistant vice president of federal government affairs. "We applaud the House for its action, and we look forward to working with the Senate on it soon."

The Big "I" last year supported defunding of PRPs via the Kingston-Boyd provision, effective 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.

A noted plaintiff’s class action law firm that has made headlines in the insurance industry, Milberg Weiss Bershad & Shulman, along with two of its named partners, David Bershad and Steven Schulman, were indicted by a Los Angeles federal grand jury May 18, 2006 after a six-year investigation by the U.S. Department of Justice into the firm’s activities. The 20-count indictment alleges that the firm and the partners participated in a kickback scheme where individuals were paid for serving as named plaintiffs in more than 150 class-action and shareholder derivative action lawsuits. According to the indictment, the firm received more than $200 million in attorneys’ fees from these lawsuits from 1981 continuing through 2005. Some of those cases were insurance class actions.

In addition to the firm and its named partners, the indictment also charged Seymour Lazar and Paul Selzer in the conspiracy. The indictment also names Steven Cooperman and Howard Vogel as co-conspirators but does not name them as defendants. Lazar, Cooperman and Vogel are alleged to have served as paid plaintiffs and received millions of dollars in illegal compensation from the firm. Selzer is alleged to have been one of the intermediary lawyers who laundered the kickback payments for Lazar. According to the Justice Department, Cooperman is cooperating with the government’s ongoing investigation, and Vogel had previously entered into a plea agreement where he agreed to plead guilty to making a false declaration to a court and lying under oath.

The indictment charges the firm and its two partners with conspiring to obstruct justice, conspiring to make false declarations under oath in court, conspiring to travel in interstate commerce and use mail facilities to commit bribery, conspiring to commit mail and wire fraud, and conspiring to make illegal payments to witnesses, along with charges involving mail fraud, conspiracy to commit money laundering and criminal forfeiture. Lazar is charged with conspiracy, racketeering conspiracy, mail fraud, money laundering, obstruction of justice, criminal forfeiture and subscribing to false tax returns. Selzer is charged with money laundering and criminal forfeiture.

Bershad and Schulman took leaves of absence from the law firm last week. The indictment does not prohibit the law firm from practicing law; however, it is already impacting Milberg Weiss’s business. Shortly after the indictments were announced, the attorney general for the State of Ohio asked the firm to withdraw as counsel for the Ohio Tuition Trust Authority in a class action.

For more information, contact Big "I" Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.

Other segments of the insurance industry are beginning to sign on to settlement agreements with New York Attorney General Eliot Spitzer. As a result of an investigation of title insurance companies that began in 2004 as a part of the investigation into bid rigging and steering in the property-casualty market, two title insurance companies, Fidelity National Title Group, Inc. and First American Title Insurance Company have settled with New York the allegations of illegal rebates and referral fees.

On May 23, 2006, the two companies signed the Assurances of Discontinuance. As a part of the agreements, the companies agreed to file an application for a downward deviation of 15% from current title insurance rates on all properties in New York valued at up to $1 million.

The allegations in the agreements describe a scheme whereby large real estate developers would receive free or discounted title insurance in other states in exchange for giving their New York business to the two companies. New York has a fixed rate schedule and firms cannot charge rates different from the filed rate. The scheme involved "rate blends" where the developer would pay the full regulated New York rate, but then get discounted or free title insurance in states that do not require a fixed rate schedule. The New York rate would in essence be "blended" with other states and result in lower title insurance for those large developers.

The agreements also contend that the companies paid illegal referral fees. New York law prohibits the payment of referral fees by title insurers to representatives of the insured. Payments can only take place if those representatives perform "substantial services" to the insurer. According to the agreements, the companies paid the referral fees when the representatives did not perform substantial services.

In addition to filing applications for the downward deviation in insurance rates, both companies agreed to pay $2 million in fines, cease paying illegal rebates and referral fees, and develop a rate calculation Web site for customers to calculate the insurance premiums along with agreeing to other compliance measures.

Both companies comprise more than 50% of the total New York title insurance business.

For more information, contact Big "I" Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.

Most Americans understand that they have a responsibility to pay their fair share of taxes to fund the services our government provides. However, with so many types of taxes---from federal income tax, to payroll tax, to state income tax, to property tax---most do not realize exactly how much a typical working American pays out.

Every year, a taxpayers group designates a Tax Freedom Day, which represents how far into the year Americans have to work just to pay their total tax liability. In 2006, the Tax Freedom Day fell on April 26, almost a full four months into the year. (When selecting that date, the group made average assumptions such as whether the person is employed or self-employed, lives in a state with an income tax, etc.)

There is one tax that is increasingly costly and provides a disincentive for self-employment: payroll taxes. This year, the Social Security Wage Base for FICA contributions is $94,200. This base amount is indexed to increase annually and by 2008 will be approximately $100,000. What will that mean in terms of payroll taxes? Let's take a situation where an independent agent has $100,000 of income after business deductions. In this example, the total payroll taxes the principal pays will be in excess of $15,300 ($100,000 x $15.3 = $15,300). The agent will still have federal and state income taxes due on the entire $100,000 less itemized deductions and exemptions (disregarding any impact by the Alternative Minimum Tax). Clearly, taking into account the cost of health insurance, payroll taxes, professional liability coverage, etc., the agent has significant expenditures that require meaningful revenues to make it worth his while to be self-employed.

What is the best way to combat this problem? With a retirement plan, a self-employed person can lower his FICA taxes by maximizing (to the extent that he can) his retirement contributions. A self-employed person with $100,000 of taxable income could contribute $25,000 to a profit sharing/401(k) plan to lower his FICA contributions by $3,825 plus corresponding federal and state income taxes. He could contribute an additional $15,000 ($20,000 if over age 50) to the plan’s 401(k) component, although the additional contribution would not lower his FICA contribution. The question may arise, "What if the agent cannot afford to contribute the maximum?"

Let's take a scenario where an individual decides to go out on her own at age 55. She had amassed a significant 401(k) balance in her prior employer and now wants to work several years on a self-employed basis. Under the 401(k) distribution rules, if she takes out substantially equal payments for at least five years, or after age 50.5 (for example, if she has $300,000 in her 401(k) plan, she can withdraw $18,000 annually given current assumptions) and uses those withdrawals to provide more disposable income, she could do so without incurring the 10% excise tax on distributions prior to age 50.5. Essentially, she would be swapping dollars, i.e. withdrawing money from her existing 401(k) plan so that she can maximum her contribution to her profit sharing plan and lowering her FICA contributions.

This might make sense for your own situation, or it might solve a customer’s problem. If your agency writes professional liability coverage, some of your current customers might benefit from establishing a retirement plan and utilizing this strategy. Of course, it makes sense to involve the customer's advisors to gauge if it’s a good fit for them. It might reduce the number of days that they have to work for their own Tax Freedom Day.

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