T H U R S D A Y ,  M A Y   2 9 ,  2 0 0 8 

Big “I” National News

On the Hill
House Subcommittee Holds Hearing on Credit Scoring
Committee hears testimony from FTC, NAIC, NCOIL and consumer and trade groups.

On May 21, the House Financial Services Oversight and Investigation (O&I) Subcommittee held a hearing titled “The Impact of Credit-Based Insurance Scoring on the Availability and Affordability of Insurance.” The hearing was a follow-up to a similar hearing held in October 2007. 

The use of credit scores in the insurance business is receiving increased attention in Congress, mainly as a result of a study completed by the Federal Trade Commission (FTC) last year, which actually showed credit scores could be an effective indicator of risk, but also found they could serve as a small proxy for race in auto insurance lines.

Since the FTC study was released, there have been two bills introduced to limit or ban the use of credit scores in insurance. Rep. Luis Gutierrez (D-Ill.) introduced H.R. 5633, the Non-Discriminatory Use of Consumer Reports and Consumer Information Act of 2008, which would prohibit the use of credit scoring for any lines of insurance if the FTC determined that the credit score was a proxy for race. More recently, Rep. Maxine Waters (D-Calif.) introduced H.R. 6062, the Personal Lines of Insurance Fairness Act of 2008, which would remove insurance lines from the Fair Credit Reporting Act (FCRA), thereby prohibiting any consumer reports or score from being used in personal lines insurance.  House Financial Services Chairman Barney Frank (D-Mass.) and O&I Chairman Mel Watt (D-N.C.) are both cosponsors of these bills, further demonstrating the issue’s considerable traction.

Representatives from the FTC, the NAIC and NCOIL testified at the May 21 hearing. FTC Director Lydia Parnes spent much of her time attempting to clarify what the results of the FTC study actually demonstrated. There has been considerable confusion about whether the FTC actually said that credit scores were a proxy for race or whether they merely said it had the same proxy as many other factors and that it was negligible. Unfortunately, Parnes did little to clear up the question.

Florida Commissioner Kevin McCarty testified on behalf of the NAIC and spent much of his testimony criticizing the use of credit scores in insurance. However, he also stated that the NAIC’s official position is that they support further federal study of the issue. Rep. George Keiser (R-N.D.) testified on behalf of NCOIL and offered a vigorous defense of the benefits of credit scoring in insurance and spoke about the benefits of the NCOIL model act on the issue.

The hearing’s second panel was composed of representatives from consumer groups and industry associations. Charles Neeson from Westfield Insurance testified representing the Property Casualty Insurers (PCI) and spoke at length about the benefits to consumers that credit scores for insurance has provided. The Big “I” joined other industry associations, including the Financial Services Roundtable, American Insurance Association, National Association of Mutual Insurance Companies and the U.S. Chamber of Commerce, in sending a letter in support of Neeson’s testimony to the Financial Services Committee. 

Watt concluded the hearing by noting that further study was necessary on the issue. As part of this review, the FTC is now beginning a new study on the use of credit scores in homeowners’ insurance. Whether through continued hearings, FTC studies or legislation such as H.R. 5633 and H.R. 6062, the issue of credit scores in insurance is likely to continue to be a hot issue in Washington, D.C. and one in which the Big “I” will continue to play a leading role. 

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




P&C Trends
CNA Names Next Chairman and CEO
Motamed will assume Lilienthal’s position next year.

CNA Financial Corporation, the seventh largest U.S. commercial lines insurer and the 13th largest U.S. property-casualty insurer, has announced that Thomas Motamed will succeed Stephen Lilienthal as chairman and CEO of the company effective June 8, 2009.

Motamed will take the reins of the company after 31 years at Chubb, where he’s served as vice chairman and chief operating office of The Chubb Corporation, and president and chief operation officer of Chubb & Son since 2002. In both these positions, Motamed was responsible for worldwide underwriting and filed operations, strategic marketing, operations services and corporate development. Motamed also served in a variety of other upper management positions since joining the company in 1977 as a claims trainee.

“We are very pleased to have a proven insurance professional with Tom’s experience and leadership qualities taking the helm at CNA,” says James Tisch, a member of the CNA board of directors. “Tom’s broad experience across virtually every insurance discipline will be invaluable for continuing CNA’s solid performance in a tough market. I expect that Tom will hit the ground running and that it will be a smooth transition.”

“I want to highlight and acknowledge Steve Lilienthal’s ongoing accomplishments,” Tisch adds. “Under Steve’s leadership, CNA completed a very successful turnaround. Today, CNA’s financial foundation is solid and it has emerged as a very strong competitor in the commercial insurance marketplace.”

Since joining the company in 2002, Lilienthal, who will retire next year, has been instrumental in refocusing CNA’s strength in commercial insurance, re-underwritten its book of business, strengthening its financial base and rebuilding its operating platform.

“I am pleased with the enormous progress that CNA team has made and I look forward to continuing this work over the next year,” Lilienthal says. “It has been an honor to lead CNA, and as I look toward retirement, I am pleased we have found a successor of Tom’s caliber.”

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




P&C Trends
Tracking the Fortune 500 Results
P-C industry lags behind in 2007.

The results of the annual Fortune magazine study of the largest 500 companies in America are in. Unlike 2006, 2007 was generally not a good year across the Fortune 500 and the largest property-casualty insurance companies saw the same with profits down in 2007 more often than not. It’s fair to say p-c insurers making the top 500 companies in revenues were not hit as hard as some sectors of the economy, such as homebuilders and financial services, but the p-c industry lagged behind the shinning stars of 2007 --- oil, heath care and engineering/construction.

Fortune 500 vs. Insurers’ 10-Year Returns and Profit Change



Source: Fortune magazine’s annual compilation of the 500 largest companies in America. Ten-year return is for 1997-2007 and profit change is for 2006 to 2007. Return figures include stock price appreciation as well as dividends.

The graph illustrates the median total returns for the large p-c insurers are close to, but still behind, the Fortune 500 at 7% and 7.9%, respectively. Like the rest of the Fortune 500, however, results vary by company. Individually, some insurers turned in healthy profit growth figures (notably Travelers, Chubb and W.R. Berkley), while others saw profits decline from 2006 to 2007. 

Of course 2007 was a year of transition and 2008 could be a year of bigger changes for p-c insurers. According to Fortune, on June 13, 2007, the perception of risk by investors in general moved toward a skepticism of volatility that hadn’t been seen for many years. As agents of insurers who are in the risk-taking and investment business, it will be interesting to reflect on what 2008 brings as casualty market pricing softens while investment portfolio returns are doing the same.

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




L&H Trends
Getting Client Referrals Up Front
Discussing referrals is beneficial to agents and their insureds.

Everyone knows getting referrals is much easier and efficient than trying to build a new relationship. In fact, most successful life insurance agents are trained to tell their clients they get paid in two ways; 1) from the commission revenues generated from any product sales and 2) from introductions to friends, colleagues and other acquaintances of a client who could benefit from the agent’s services.

There are also two reasons an agent discusses referrals at the start of a new client relationship: 1) so it will not come as a surprise to the client when the agent asks for referrals when the work is complete and 2) it allows the agent to say to the prospective client, “I'll do a free review of your life insurance and estate planning needs in light of your current situation and objectives.” When this offer is made, the prospective client may typically respond to the agent, “but don’t you have to sell me an insurance policy to get paid?” By pointing out to the client that referrals are a form of payment, it allows the agent to offer a no obligation review of the person’s current policies and yet does not create the impression that the client will have to purchase a new policy in order for the agent to receive value.  

As life and health insurance agents know, there are very few people whose current financial and estate planning is up to date with their family situation and objectives, tax laws, employer provided benefits and other needs. Virtually everyone is in need of competent advice, whether or not it actually involves the sale of an insurance policy. It may be that the insured’s beneficiary designations are out of date. Or, their propert title is incorrectly held or is in conflict with the will’s intended distribution of assets.  Also, many times the “pour over” provision of the will is not coordinated with the client’s objectives for distribution of the property. So, assisting a client by sitting down and reviewing their situation will usually result in a need to update their policies and will.  And, discussing estate planning issues is an opportune way to begin the conversation regarding long-term care and the potential risk to an individual’s estate and how long-term care insurance can help solve that exposure.

An agent can really take heart when a client offers to call his friends and acquaintances to let them know that he has referred the agent to contact them (of course, pay attention to the  Do Not Call rules). The ultimate scenario is when a client offers to invite a friend to breakfast or lunch to meet the agent. Whatever form the client’s assistance takes, independent insurance agents should be sure to point out that they are not tied to a particular company. This should reassure clients that they can refer an independent agent to their friends because the agent can use their creativity and product knowledge to find the right solution for that prospective client’s particular need. 

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




Forms & Substance
When Workers’ Compensation Doesn’t Cut It
Determine whether businesses need UM coverage on a case-by-case basis.

Everyone’s looking for a way to reduce premiums. One method that is sometimes used is to not carry UM coverage under the BAP. After all, if an employee is injured, there’s workers’ compensation coverage, right?

The Virtual University “Ask an Expert” service recently received the following question:

“In Louisiana is workers’ compensation (WC), the sole remedy for a worker who is injured in an auto accident on company time, in a company vehicle? Is there any circumstance where UM would be required? Does the employer have to carry UM on his commercial vehicles, and is the employer obligated in any way to carry UM if there is a workers’ compensation policy in effect?”

According to one VU faculty member, “First, while workers’ compensation is the sole remedy under Title 23 of Louisiana Statutes, I have in my reference library a large, leather-bound insurance law book by Shelby McKenzie on Louisiana Insurance Law. It covers p-c and life. There are two volumes on WC, so obviously there is a lot of litigation involving WC in Louisiana, despite it being the sole remedy. Second, UM is not required to be provided by an employer in Louisiana.”

With regard to whether UM might be a good idea otherwise, here are just a few situations where the employer’s workers’ compensation won’t help:

1. The employee is using the car for personal reasons. The employee might not have a PAP or, depending on the state, it most likely will not apply to vehicles “furnished or available for your regular use.”

2. Customers or other non-employees (e.g., family members of an employee) are passengers in a company vehicle. UM could prevent lawsuits. (Don’t forget to perhaps add UM/UIM on the DOC endorsement. The UM/UIM higher limits on an umbrella is also important if the DOC endorsement is used or, for example, the boss of the company lets his teenage children drive company cars and they are not employees.)

3. Workers’ compensation only covers medical, disability, etc. and does not fully compensate for lost wages. UM coverage, for the most part, allows someone to recover tort damages, including pain and suffering, etc.

There is precedence in some states that allow the injured employee to collect workers’ compensation at the statutory percentage of their wages and then file a claim for the difference with their UM carrier when the injury was related to an accident with an uninsured motorist (e.g., Alabama allows this practice).

While UM/UIM coverage applies to a covered person regardless of employment status, two provisions in the typical coverage form were intended to prevent double recovery by an employee covered by workers’ compensation. The first provision states that UM/UIM coverage “shall not apply directly or indirectly to benefit any insurer or self-insurer under any workers’ compensation…law.” The second provision allows the carrier to offset the amount an employee received in workers’ compensation benefits.

However, some court decisions have essentially voided these provisions by allowing workers’ compensation insurers to subrogate against UM/UIM coverage carried by either the employer or the employee. UM/UIM coverage thus becomes the primary source of recovery when an employee is injured by an uninsured or underinsured motorist. For employers, this is good news from the standpoint of improving workers’ compensation experience, but bad news if the claim goes against the uninsured motorist coverage on their own business auto policy. The uninsured motorist claim will almost always be bigger than the workers’ compensation claim because it, subject to policy limits, covers pain and suffering and unlimited loss of income.

4. Your state might permit UM PD so, where another party is liable for damage to the vehicle but (under) insured, this coverage could be more advantageous than collision coverage.

5. Some employees may not have workers’ compensation coverage. This could be exempted occupations or executive officers or others who have legally exempted themselves from the coverage.

From an E&O perspective, it’s not that UM isn’t needed, it just isn’t usually needed to the extent that it is in a personal lines account. (The assumption would be, though, that if UM isn’t entirely necessary, then the cost should reflect that. If the cost is high, that would indicate that either the coverage is used more often or that most businesses buying it don’t have workers’ compensation coverage.)

Agents should give their insured the reasons for having UM coverage, then let them make a business decision.

To read the entire article, including links to supporting statistics and feedback from other agents, click here.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.