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T H U R S D A Y , M A Y 2 6 , 2 0 0 5
Non-Producer Comp: Show Me the Bonus | Civil Charges Just Around Corner for AIG | Graduations, Barbecues and COBRA | Big “I” Continues Push Against Federal Regulation | The CGL Marlboro Man Exclusion | Big "I" National News
P & C T R E N D S
Non-Producer Comp: Show Me the Bonus
Study reveals agency comp trends
What kind of raise will you give to your non-producers this year? If you’re planning on less than a 4% bump, you’re right on average. But if you’re like most agency principals, you’re linking the increase to performance-based goals rather than make raises an annual entitlement ritual.
These are a few of the findings in the 2005-2006 Non-Producer Compensation & Benefits Survey, conducted every two years by Business Management Group (BMG) and The Hartford. This survey collected information on compensation bonus and incentive programs and basic employee benefit plans for non-producers from agencies around the country. The goal of the study is to arm agency principals with benchmarks for their biggest expense: payroll and benefits.
Most study respondents indicate their planned non-producer compensation increases for 2005 will be between 3.7% and 4.4%. Actual compensation increases in 2004 averaged 4.1%. The Southwest and Pacific regions’ compensation increases were higher, averaging 4.3% and 4.6% respectively. The projected increase rate is 3.9% for 2005, slightly lower than 2004 actual rate increase, indicating agents and brokers concerns about the impending soft market and the need to control compensation expenses.
Study author Suzy Hammett says that, increasingly, agency principals are becoming more serious about linking pay and performance—no matter what the position in the agency. The study found 86% of agency respondents offered bonus/incentives to managers (up from 82% in 2003), with 75% offering bonus/incentives to non-managers.
"People in the past thought of raises as more of a guaranteed right," Hammett says. "By aligning the employee interests and the agency interests with a bonus structure, you’re tying them together." Hammett notes that this strategy is more cost effective than just handing out 4% raises "because someone is there."
Non-producer total compensation packages are evolving as well. Benefits now account for approximately 25% of a non-producers’ total compensation on average. The study found because the cost of health benefits has dramatically increased, agencies are passing on more of insurance cost to employees through increased premium contributions, higher deductibles and co-pays and assessments of prescription drug co-pays. Agencies of all sizes, from those with 50 or fewer employees to those with more than 500, are finding premiums rising 10% to 20% over 2004 rates, according to the study. Higher medical costs are having a trickle-down effect on other benefits. "In addition to making employees pay more for their benefits, agencies are also shifting benefit dollars," Hammett says.
For example, educational subsidy programs (whether it is for tuition reimbursement, professional designations, etc.) are becoming a casualty. In the 2003 study, 79% of agencies reported offering some sort of educational subsidy program. This year, only 68% of agencies say they offer the benefit.
"Two years ago, the focus was really on developing and training your own staff because these people were not out in the marketplace," says Hammett. "Agencies are having trouble finding these people—and they still have to find them. It’s still important, but in terms of the dollars—they’re not being put toward training because of increased expenses."
Watch for next week’s IN&V for more on the study results, including information on how agencies are shifting their non-producer compensation budgets to new job functions (like IT managers!).
Katie Butler (Katie.butler@iiaba.net) is editor in chief ofIA. To learn more about the study, go to www.bmgconsulting.com.
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
Civil Charges Just Around Corner for AIG
Arthur J. Gallagher Reaches $27 Million Settlement
After months in the spotlight and much speculation, American International Group, Inc. appears to be on the verge of receiving a civil complaint from New York Attorney General Eliot Spitzer and the New York State Insurance Department.
The Wall Street Journal reports that the civil complaint, which could come as early as this week, alleges that AIG "improperly burnished its financial results and repeatedly duped regulators and investors."
Additionally, Reuters reported last Friday that a New York grand jury is weighing evidence that could result in criminal indictments at AIG. According to the repot, Spitzer is providing the grand jury with evidence, and "AIG Senior VP Joseph Umansky has testified in exchange for immunity from charges possibly resulting from the proceedings."
According to the WSJ, former CEO Maurice "Hank" Greenberg and former CFO Howard I. Smith are among the individuals the grand jury is looking at for possible criminal indictments.
As reported in the April 2 issue of IN&V, Spitzer has said that AIG may reach a civil settlement of the issues.
Greenberg reportedly met with shareholders of Starr International, the private entity he still runs that owns about 12% of AIG’s shares, on Tuesday. According to the WSJ, they discussed if AIG was "applying more-conservative accounting in at least some instances than it needs to."
Meanwhile, last week Arthur J. Gallagher & Co. reached a $27 million settlement with Illinois Attorney General Lisa Madigan and Illinois Department of Financial and Professional Regulation, Division of Insurance Director Michael McRaith.
"Our comprehensive investigation revealed Gallagher sought and obtained huge payments from insurers in return for steering them enough business to meet secret threshold targets," Madigan said in a statement. "Gallagher never should have accepted these payments without fully and clearly disclosing that these targets and payments created a potential conflict of interest between Gallagher and its clients."
Gallagher did not admit to wrongdoing or deceitful conduct in the settlement, and is not required by it to issue an apology. The company emphasized in a statement that "there was no lawsuit involved nor were there any findings of unlawful or deceitful conduct or that any client had client had been disadvantaged."
Among other things, the agreement sets up a $27 million restitution fund for certain retail clients, eliminates contingent commissions for retail clients and discloses compensation for services to retail clients.
"These new measures will benefit our clients and we believe all insurance organizations should adopt similar measures," President and CEO J. Patrick Gallagher Jr. said.
Another state got in on the regulatory action this week as Florida’s Office of Insurance Regulation issued an order to AIG’s 43 licensed insurance entities in the state to "turn over information regarding AIG’s admitted misrepresentations on financial statements."
Additionally, AIG " must report on the nature and extent of these misrepresentations and identify and remove any parties culpable in this matter." AIG also must file "true and correct financial statements" for the years 2000 to 2005 for the 43 Florida entities by July 1, 2005.
According to a statement, "Failure to comply with the Order may lead to the suspension of AIG’s licensed companies in Florida and other potential action against these companies and affiliated parties to enforce compliance with the laws of the State of Florida."
In other state news, West Virginia Attorney General Darrell McGraw filed suit against Acordia of West Virginia, Inc. for allegedly steering business in exchange for hidden contingent commissions, according to BestWire. Acordia had no comment on the lawsuit but said it "does not condone or tolerate improper or unethical behavior in the conduct of its business."
March & McLennan is back in the news as well. At a shareholders meeting last Thursday, CEO Michael Cherkasky said that the company is putting its settled regulation problems in the past. "I’m not going to apologize anymore. We’ve apologized enough," he said.
Cherkasky also said that some managers who were forced to leave the company in the wake of the regulatory investigations were held responsible by the company’s board of directors "even if they did not participate in the alleged abuses," according to National Underwriter.
"He said a few managers were removed from the company because they were culpable, but others who did not participate still needed to be held responsible because the allegations of kickbacks and steering of accounts at Marsh, its insurance brokerage subsidiary, occurred on their watch," NU reports.
Jennifer Sikorski ( jennifer.sikorski@iiaba.net) is IA’s associate editor.
L & H T R E N D S
Graduations, Barbecues and COBRA
On "The Johnny Carson Show," Carson’s alter ego, Karnak the Magnificent, would read seemingly unrelated answers and then divine the question. What question would he use for "graduation," "barbecue" and "COBRA?"
What will and should some of your customers be involved with at this time of year?
You may not have immediately figured out the association between COBRA, graduations and barbecues, but it is a major consideration for many parents of graduating students. Under most health insurance plans, children no longer qualify as dependents for the purposes of medical insurance coverage when the turn 18 and do not attend college, or when they graduate from college.
Employers with more than 20 employees are subject to COBRA, the continuation option for individuals who experience a "qualifying event," such as a job loss or divorce, that means they no longer are eligible for health insurance plan coverage. Under COBRA, those individuals have the right to continue the coverage by paying the total cost within 60 days of notification.
Many young people lose sight of this timeframe in the hubbub of moving, looking for a job and other distracting events. They then run the risk of having to find coverage of their own. As a result, many young people end up not continuing their health insurance coverage because of oversight or sky-high medical premiums. Typically, the coverage provided is more generous than they need at that point in their lives, and they would benefit cheaper plans that provide catastrophic coverage. And, eventually they will need their own policy if they haven’t found coverage through an employer during the 18-month COBRA period.
Why is this important for independent agents? Agencies that provide personal lines and health insurance, should remind clients abut this exposure via mail, e-mail, or in person discussions or. If customers’ recent graduates run into a serious medical problem, the parents most likely would end up bearing a significant portion of the cost. Also, changes in bankruptcy laws make it more difficult to file for bankruptcy, and the recent grads could end up with a draconian financial burden for the foreseeable future.
Remind your customers that your agency can help them with this exposure—that will help everyone rest easy this summer.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for IA magazine.
O N T H E H I L L
Big “I” Continues Push Against Federal Regulation
The debate over state versus federal regulation of insurance has begun to heat up again, and the Big "I" is leading the charge against the creation of a federal regulator for the industry. Last week, Charles Symington Jr., Big "I" senior vice president of government affairs and federal relations, made the case against federal regulation in a leading Capitol Hill publication and in an insurance trade magazine. He also reiterated the association’s support of the State Modernization and Regulatory Transparency (SMART) Act.
Symington spoke with Congress Daily for an article noting that a new group was pushing the message that not all insurance agents oppose optional federal chartering.
In the article, Congress Daily pointedly contrasted the 200-member group’s recent "fly-in" of 16 members with the Big "I" membership of 300,000 and its attendance of more than 1,000 agents at the recent National Legislative Conference.
"As the premier trade association representing 300,000 independent agents and brokers from across the country, we oppose an optional federal charter and yet support the SMART Act," Symington said. "We had never heard of this so-called group…but we look forward to determining who their limited membership may be."
Symington also spoke with National Underwriter regarding a recent vote by the Ohio House Insurance Committee asking Congress not to pass federal-tools legislation. In the interview, Symington noted the strong support of the SMART Act’s co-author, House Financial Services Committee Chairman Mike Oxley (R-Ohio), for state-based regulation.
"Unfortunately, some at the state level are getting hung up on minutiae and do not see the big picture," Symington said. "Chairman Oxley is one of the strongest supporters of state insurance regulation. As a former member of the National Conference of Insurance Legislators, he understands the strengths of the state system—but he also understands the weaknesses. That is why he wants to modernize the system to bring it into the 21st century and forestall creation of a federal regulator."
Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.
F O R M S & S U B S T A N C E
The CGL Marlboro Man Exclusion
An insured owns an exclusive private club where smoking is permitted in certain areas. The insured has inquired about liability for patrons who could allege bodily injury as a result of exposure to secondhand smoke, and he wanted to know if there was a coverage issue. Would the CGL respond to such claims?
In this scenario, the agent asking the question indicated that this would be a CGL claim and there shouldn’t be any problem regarding coverage. Then he re-read the pollution exclusion and the definition of "pollutant," which includes smoke, which led him to conclude that an insurance carrier is on strong ground to deny this type of claim. So, if not covered by the CGL, is a pollution policy the only recourse?
Although there is a wide disparity among court decisions, I suspect that the wording in the CGL is now so stringent that it is not unlikely at all that many, if not most, courts would also uphold the exclusion. So, it’s best to follow the "better safe than sorry" advice and take remedial risk management action.
If you’ve ever been to Las Vegas, it’s amazing how clean the air is in most of the hotel casinos despite the number of smokers. I suspect they must have extraordinary air exhaust/recirculation systems—something this insured might want to consider, if not an outright ban of smoking inside the premises.
Here are some possible insurance remedies from the Virtual University faculty:
· Some people are highly allergic to tobacco smoke, so the question is not farfetched. But coverage under the standard form CGL doesn’t appear in my view. A more serious potential problem could be an employee claim under workers’ compensation. For the price of pollution coverage, they can vent the place.
· As I like to tell people, "Everyone has a pollution exposure." Looking at the broad definition of pollutants and the fact that there is no coverage for any loss that occurs on or arises out of an insured’s premises, it is hard to imagine any risk without some exposure. A case could be made that all commercial risks that own a premises should, at the least, have something like the ISO Limited Pollution Endorsement (CG 24 15) which removes the premises part of the exclusion, among other things, except for USTs (and therefore provides coverage and defense). This endorsement (or a company equivalent) seems to be relatively easy to get these days.
· No one will deny that smoke is considered a pollutant or that the release of this pollutant is on premises that the insured owns, occupies, rents or has loaned to them, and the release is neither "sudden nor accidental." The hostile fire exception will not apply as a lit cigar does not represent a hostile, but friendly, fire because it is contained within the place for which it was intended. All of this however, is moot if the insured’s contract has been endorsed with CG 21 49, Total Pollution Exclusion Endorsement, and then, whatever small amount of pollution covers existed prior to the addition of this endorsement is eliminated.
· A case similar to this scenario is New York/State Appellate, Demakos vs. Travelers Insurance Company, 613 NYS2D 709 (AD 2 Dept. 1994) where the carrier was found not liable under the policy for any physical or property damage caused by pollutants. The policies defined term pollutant to include smoke and noxious fumes and vapors. The claimant sued their landlord for physical damages caused by cigarette smoke which allegedly seeped into the tenant’s premises from the pool and billiard club in the basement of the building. The insured landlord sought coverage from the insurer which was denied based on the pollution exclusion.
· One possible solution may be to add CG 04 30, Exception for Designated Pollutant. This endorsement requires that the pollutant excepted for coverage be "used in connection with the insured’s operations." That would certainly be the case in this scenario. Another alternative is the CG 04 22, Pollution Coverage Endorsement. However this endorsement is difficult to obtain. It will provide broad coverage for BI and PD as a result of released pollutants but affords no cleanup coverage. That should not be a problem with the cigar smoke. As this risk is a restaurant, cooking oils and various cleaning solvents may be an issue with the underwriter.
· Short of posting an exculpatory notice or other disclaimer regarding the smoke on the front door, the insured should look for pollution coverage in the E&S market if he’s unable to obtain one of the aforementioned coverage endorsements.
To read the entire article on the VU Web site, click here.
Bill Wilson (bill.wilson@iiaba.net) is the Big "I" director of Virtual University.
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