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Big “I” National News

Producer Compensation Issue Update

RIMS Releases Statement on Industry Compensation, Placement Practices
Organization ‘disappointed’ in agents, brokers’ acceptance of fees.

In August 2005, the Risk Insurance Management Society, Inc. (RIMS) issued a statement on industry compensation and placement practices, applauding brokerages that pledged to refuse placement fees from insurers on business in which they represented the buyer. Two years later, RIMS has found that some brokers are reconsidering that pledge and are accepting the fees. In response, the organization issued a “Statement on Industry Compensation and Placement Practices” this week explaining its stance on broker compensation.

“RIMS recognizes that contingent commissions are currently paid on agency-generated business, where the agent represents the insurer not the buyer,” the RIMS statement says. “Such practices have always existed in the insurance markets. However, for brokers and independent agents to accept these fees in transactions that are made on behalf of the buyer represents an inherent conflict of interest. The recent investigations, admissions and fines demonstrate how these practices can be manipulated to the disadvantage of the insurance buyer.”

RIMS acknowledges that many of the smaller, regional and/or privately held brokerages were not involved in the investigations and settlement agreements and have continued to utilize placement service agreements and contingent compensation agreements, however the organization reaffirms its disapproval of compensation arrangements for any broker or agent who acts on behalf of the buyer.

“…RIMS believes that all sources of compensation, direct and indirect, now or in the future, should be disclosed to clients without their request,” the statement says. “This disclosure will ensure that the risk manager understands not only the cost of coverage, but any arrangements with specific insurance companies or any fees obtained by the broker/agent from markets approached on behalf of the insured. The existence of compensation arrangements and the amount of potential compensation should be disclosed prior to placement of business and annually by line of coverage. Failure to disclose such arrangements runs counter to the spirit of partnership that risk managers seek to achieve with their brokers, vendors and insurers.”

RIMS is advocating for an open dialogue between all parties affected by all issues of compensation and believes broker compensation and insurer selection should “be governed by the principles of complete transparency and full disclosure without client request.” The group also is urging risk managers to evaluate the level of transparency and full disclosure in their broker relationships, vocalize their concerns on the issue and hold providers accountable for their actions.

Look for further coverage of the RIMS statement on compensation in next week’s IN&V.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

P&C Trends

Loyalty Cannot Be Bought
Study finds most customers satisfied with agents, won’t leave for any price.

The majority of Americans are satisfied with their insurance providers, according to a recent survey commissioned by IBM.

The survey of 1,000 U.S. consumers found that 75% of respondents are very satisfied with the services provided by their agent and plan to continue doing business with them in the future.

According to IBM, the study’s findings are a reassurance to agents and carriers that have faced increased competition from direct channels and direct-only insurance carriers.

“The study demonstrates consumers’ unwavering loyalty to their insurance agent regardless of potential savings that online channels alone can provide, and it indicates how insurance carriers are providing their agents with innovative technologies to deliver more personalized customer service,” IBM says.

And the proof is in the numbers, since the survey found that only 15% of consumers would consider dropping their agent to save $150 annually by purchasing insurance online and a whopping 54% said that no amount of savings would make them switch. Forty-four percent of consumers also said their insurance provider is “innovative” when it comes to using technology in comparison to other industries (such as travel and retail) and 71% of respondents said they will work directly with their insurance agents for their future insurance needs.

Customer service and human interaction both emerged as key drivers of customer loyalty to agents, with 53% of consumers citing personalized service as the best service their agent offers and 36% saying they like to visit their agent.

“The insurance business is still very much relationship-based, and consumers are willing to pay a premium for agents that instill trust and provide ongoing advice regarding their insurance needs,” says Norbert Dick, general manager, Global Insurance Industry, IBM. “But insurers should not ignore the potential in the online channels for maintaining existing customers’ loyalty and capturing additional market segments. A combination of back-office process improvements and customer experience improvements across channels like the Web, e-mail and cell phones can pay dividends in terms of repeat business and brand loyalty. And for customers who are looking at direct channels, particularly younger, emerging market segments, channel investments stand to gain new business.”

In addition to its consumer study, IBM also recently conducted a poll of agents from companies that represent 46% of premiums generated in personal lines insurance segments. The study covers 11 areas of agent behavior, needs and attitudes and found that carrier reputation and the amount of carrier support are tantamount to agents’ satisfaction. Agents also said they are happy with their work environment and are “optimistic about growing their customer base,” with 60% of those polled saying they have seen an increase in new business in the past 12 months, according to IBM.

Cross-selling and retaining customers are also key factors for agents. Forty-two percent of respondents said their new business came from cross selling and 56% said their primary focus is on managing existing customers.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

On the Hill

Optional Federal Charter on Table Again
Senators introduce OFC bill for second consecutive year.

For a second straight Congress, Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.) have introduced an Optional Federal Charter (OFC) bill. Last week, the senators introduced S. 40, the National Insurance Act of 2007 (NIA), a bill the Big “I” strongly opposes. The bill is very similar to OFC legislation the senators authored last year, which was the topic of two Senate Banking Committee hearings. According to the senators, it is based on the dual-charter system in the banking industry and would allow insurers operating under multiple state jurisdictions to choose to be regulated at the federal rather than state level.

Although the Big “I” agrees that there is a need for uniformity and greater efficiency to the system, the Big “I” disagrees that OFC and federal regulation offer the solution.

First, OFC would confuse consumers and cause coverage gaps by creating a federal/state regulatory system. This dual structure could also have disastrous implications for solvency regulation by largely bifurcating this key regulatory function from guaranty fund protection.

Although the NIA would address some agent licensing concerns, the proposed legislation would lead to additional regulatory burdens on agents and brokers and would negatively impact their ability to represent customers by establishing a distant federal regulator in Washington, D.C. With some companies choosing federal regulation and others state regulation, independent agents would have to understand and navigate the state system and an entirely new federal one. Also, by eliminating or drastically limiting regulatory review of policy language for the small commercial and personal lines markets, the NIA would leave consumers unprotected and would create a huge E&O liability for independent agents.

Additionally, the bill would create a massive new bureaucracy for the insurance industry and approaches regulation through a one-size-fits-all scheme, rather than recognizing the individual needs of each state. Instead, the Big “I” supports targeted federal legislation to reform the state insurance regulatory system, which relies on the years of skill and experience of states as insurance regulators. The Big “I” believes that the current state insurance regulatory system ensures a level of responsiveness to consumers and agents that could not be matched at the federal level.

In March, Florida Senators Mel Martinez (R-Fla.) and Bill Nelson (D-Fla.) introduced S.929, the Nonadmitted and Reinsurance Reform Act, which the Big “I” supports. This more pragmatic approach would help bring needed uniformity to the surplus lines and reinsurance markets. Legislation such as this would not create a federal regulator but would modernize state insurance regulation, which the Big “I” agrees, is overdue. This approach can be used for other areas in need of reform, most importantly agent licensing.

Supporters of OFC include the American Insurance Association, the American Bankers Association and the American Council of Life Insurers. Groups joining the Big “I” in opposing the legislation include The National Association of Mutual Insurance Companies, the Coalition Opposed to a Federal Insurance Regulator and companies such as Aflac and Jackson National, amongst others.

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

Legal Advocacy

Settlement Reached For World Trade Center Insurance Claims
Insurance proceeds to be used to finance the rebuild.

Last week, New York Gov. Eliot Spitzer and the State Insurance Superintendent Eric Dinallo announced a settlement between Silverstein Properties and seven insurance companies. The $2 billion settlement resolves all outstanding property insurance claims from the destruction of the World Trade Center buildings on Sept. 11, 2001 and paves the way for the redevelopment of the site.

Silverstein Properties leased the buildings from the Port Authority in the summer of 2001. On Sept. 11, the insurance policies had not been finalized when the building was destroyed. After a series of lawsuits, the New York courts found that the maximum Silverstein could recover from the insurance companies was $4.68 billion. The insurance companies paid about one-half that amount and the rest was left in dispute.

The insurance companies involved in the settlement were: Travelers Companies, Inc., Zurich American Insurance Company, Swiss Reinsurance Company, Employers Insurance Company of Wausau, Allianz Gobal Risks U.S. Insurance Company, Industrial Risk Insurers (now owned by Swiss Re) and Royal Indemnity Company. The terms of the settlement include a confidentiality provision that prohibits disclosure of the specific amounts that each company paid.

Now that the property insurance claims have been resolved, Silverstein and the Port Authority can proceed with rebuilding on the site. The insurance proceeds will be used to finance the rebuilding.

“It is essential that the rebuilding at the World Trade Center site proceed as quickly as possible,” Spitzer says. “The unsettled insurance claims were the last major barrier to rebuilding and have been bitterly and intensely contested for almost six years. The settlement is the result of an extensive collaborative effort by many and it ensures that the Port Authority and Silverstein Properties will have the financial resources to meet their obligations and rebuild at the World Trade Center site in a way that will make all New Yorkers proud and fuel the revitalization of Lower Manhattan.”

For more information, contact Kathleen Graber, associate general counsel at 703-706-5432; kathleen.graber@iiaba.net.




Legal Advocacy

State Farm Settles Screen Enclosure Lawsuit in Florida
Insurer will pay policyholders for storm-damaged screens.

Last week, press reports announced that State Farm settled a class action lawsuit in Florida, agreeing to pay $6.8 million to homeowners in Florida for damages to screen enclosures due to Hurricanes Katrina and Wilma. The settlement resolved claims that State Farm under compensated insureds for damage to screen enclosures on their property.

State Farm standard homeowners’ policies call for replacement of storm-damaged screens, less depreciation. Due to what State Farm characterized as a printing error, the 12,000 policies at issue called for full replacement value with no depreciation. State Farm claimed it did not realize that the policies contained the “printing error” until after it paid the claims for the depreciated amounts and was sued.

According to press reports, State Farm spokesman Phil Supple said, “This was an unfortunate printing error that cost us $6.8 million. These policyholders actually received more coverage than they paid for. It was our error, and we’re owning up to it.”

The homeowners involved may not have the same perception as State Farm about whether all the coverage stated in the policy was paid for, but the settlement should give the homeowners the recovery the company contractually obligated itself to under the policy terms.

For more information, contact Kathleen Graber, associate general counsel at 703-706-5432; kathleen.graber@iiaba.net.