T H U R S D A Y ,  J U N E   5 ,  2 0 0 8 

Big “I” National News

P&C Trends
Hurricane Season Brews Credit Concerns
Storms could be a catalyst for decreased cash flow.

With the credit markets already in distress due to current economic conditions, the possibility of a hurricane making landfall in the U.S. this season carries new concern, as investors show a limited appetite for capital-market offerings designed to raise cash for claims payments, according to a report from A.M. Best.

“Amid the most severe credit crunch in more than a decade, companies and municipalities are finding it harder to raise cash at attractive rates,” says A.M. Best’s report, “Credit Crunch Clouds Outlook of Hurricane Insurers, Cat Funds.” “Meanwhile, forecasters are in agreement that 2008 is likely to be a busier than average hurricane season.”

This season’s forecast is in fact predicted to be “above average,” according to Colorado State University, which predicts 15 named storms and eight hurricanes, four of which are expected to be intense for the Atlantic region.

According to A.M. Best, Florida has risked more than any other state on its ability to fund hurricane losses through post-event bond offerings, but it isn’t alone in the pressures it’s facing. Other states have also examined similar financing options for their state-run wind and beach pools.

“Insurance regulators and lawmakers in a growing number of states have had to examine current claims-paying arrangements for wind and beach pools because of significant growth in these plans’ liabilities in recent years,” the report says. “Texas officials, for example, estimate exposure in that state’s windstorm pool could reach $70 billion by the end of 2008, up from nearly $21 billion in 2004.”

Should larger, state-run wind and beach plans experience a short fall this season, they will have to rely on assessments from insurers writing business in those states to pay claims; any reinsurance the plans may have obtained in the private market and emergency assets. However, in the past, regulators and board members of some insurers of last resort have considered bond offerings to boost their claims-paying abilities, similar to those in place for the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corp.

The subprime mortgage crisis also raises questions about insurers’ exposure to foreclosed and abandoned properties in hurricane-prone regions. As of April 24, the crisis has driven the number of properties in foreclosure past the 500,000 mark in hurricane-prone coastal states, according to the Institute for Business & Home Safety by Realty Trac. Furthermore, unoccupied properties in these areas may be at an increased risk in the event of a storm and financial strain on homeowners may increase the rate of insurance fraud, according to A.M. Best.

“Some homeowners, in default and holding properties that aren’t worth the outstanding mortgage balance, already are walking away,” A.M. Best says. “A few even torch their properties to collect the insurance payout, and a major hurricane or other catastrophe could provide cover for fraud…post-catastrophe insurance fraud is nothing new, but it’s not clear how well insurers grasp the potential increase in exposure, given the current economic climate. They may know their customers’ credit scores, but they may not know how many properties are foreclosed and sitting empty or mortgaged with subprime loans that are about to overwhelm the borrowers.”

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




P&C Trends
Stock Beta and the P-C Industry
How do insurance stocks stack up against the stock market?

Last week a member inquired after reading the Insurance News & Views article, “Tracking the Fortune 500 Results,” whether insurance company stock prices generally track with the overall stock market. Or, conversely, are insurance stocks more counter-cyclical, like gold? There is actually a well-established technique for answering this question: the “stock beta.”  Insurance stocks are generally less volatile than the stock market in general, but it varies widely by the insurance stock.

According to the online stock information site, Clear Station, the p-c insurance industry is about 18% less volatile than the stock market in general. The p-c industry stock beta is approximately .82 compared to the beta for the S&P 500 which is 1.00. That is, if stock prices in general go up by 10%, insurance stocks should go up by 8.2%. If stocks fall 10%, insurance stocks would be expected to fall by only 8.2%.

As seen in the chart below, individual stocks stock returns and the beta can vary significantly. The chart illustrates the 10-year total stockholder returns, as reported in last week’s article, along with the stock beta of for each insurer’s stock. The insurers shown were selected from the Fortune 500 list and the insurer’s ranking within the Fortune 500 is listed in the parenthesis. The stock beta varies from a low of .30 for W.R. Berkley to a high of 1.38 for Safeco.



For more detailed information on stock betas, the online encyclopedia, www.wikipedia.org, does a good job of describing the calculation, as well as the concept risk versus return expectations in a free market. Individual stock betas can be readily found on a number of Web sites for free including www.clearstation.com (look under “key ratios”) and www.yahoo.com/finance (look under “key statistics”). 

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




L&H Trends
Proactive Pension Planning
Agents can protect insureds by encouraging them to monitor their pensions.

Many people have probably never considered what would happen to their monthly pension check if the company they worked for (or retired from), which provided a defined benefit pension plan, went into bankruptcy. While defined benefit pension plans have been steadily declining in popularity among private sector employers, there are millions of Americans who depend on them for retirement income. Given that the traditional, large industrial companies have greatly declined (steel, auto and manufacturing), these companies tend to have significantly more retired than active employees. And, because of the mediocre stock returns of the past five years, many are substantially under funded.

So what happens when a company with an under-funded pension plan goes bankrupt?  Until 1974, there was little or no protection for company provided pension plans. One of the most shocking examples of workers losing their retirement benefits occurred in 1963 when Studebaker terminated its employee pension plan. More than 4,000 auto workers at its automobile plant in South Bend, Ind. lost some or all of their promised pension plan benefits.

As a result, the Pension Benefit Guarantee Corporation (PBGC), a federal agency, was created by the Employee Retirement Income Security Act of 1974. It currently protects the pensions of nearly 44 million American workers and retirees in 30,330 private, single-employer and multi-employer defined benefit pension plans. PBGC receives no funds from general tax revenues. Operations are financed by insurance premiums set by Congress and paid by sponsors of defined benefit plans, investment income, assets from pension plans trusted by PBGC and recoveries from the companies formerly responsible for the plans.  However, workers should not be misled that the full amount of their pension benefits are protected.

In fact, some of the 3,300 retirees of Republic Technologies International are being told they must pay back tens of thousands of dollars in pension overpayments since Republic Technologies declared bankruptcy in June 2002. The Akron-based steelmaker’s obligations were picked up by the PBGC, which limits payouts according to rules set by Congress. For example, one retiree, Richard Wyers, was notified he owes $53,415.60. Wyers anticipated a monthly benefit of about $2,400 when he was working at the mill, but that was slashed to $1,088.27 when the PBGC assumed the plan. Now he is being told that he will get $325.19 a month, minus a recoupment deduction of 10%, yielding $292.67 before taxes.  

The lesson for independent agents who provide financial services is to remind their clients to monitor the financial condition of their company’s pension plan (if they have one), and be aware that there are caps on the amounts the PBGC will guarantee. Buying an immediate fixed annuity from an insurance company with a strong financial ratings is one way to help diversify a retiree’s retirement income. Also, although many people are covered by municipal retirement plans and believe that the local government will always be able to meet their pension obligations through their taxing authority that may not be true. Agents can help customers review their objectives and provide alternative safety nets to safeguard their retirement objectives.

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




Tech Updates
Tips Agents Should Know about Search Engine Optimization
Agencies don’t need a big budget to optimize their sites for search engines.

More and more, independent agents and brokers are being encouraged to make better use of the Web to reach prospects and service customers—and that’s good advice. Three quarters of American adults use the Internet, and 81% of those use the Web to research their options before making a purchase—whether or not they plan to buy online.

But first they have to be able to find you. And that means implementing a search-engine optimization (SEO) strategy that will make it easier for them to do so. Unless your URL is incredibly simple and well known—like nike.com or apple.com—even people who know you will use a search engine to find your site.

Essentially, an SEO strategy should elevate your firm’s placement in organic—unpaid—searches for keywords related to your business. This is done by making your site easier to find and more appealing to the search engine “spiders” or “bots” that comb the Internet for pages relevant to the keywords entered in a search. While the major search engines (including Google, MSN, Yahoo and Ask) are secretive about their methodologies for determining those placements—and those algorithms are said to change frequently—these tips should enable any agent to increase their search engine rankings.

1. The click is the thing. The most important driver in SEO is the frequency with which your site is clicked within the search results themselves. So, if in a search for car insurance and your zip code, your site appears in the results and is clicked often, your ranking in that search engine will elevate. Therefore offline and other online promotions are vitally important, as familiarity of your brand will increase the likelihood of a user clicking on your URL in a list of search results.

2. Links are key. Another important driver of organic search results is the number and popularity of the other Web sites that drive traffic to your site. So, if www.XYZ.com receives visitors who link from other Web sites that are popular, XYZ’s rank in an organic search will be higher. (The number of links from the XYZ site does not enter into the equation, except if those links represent reciprocal links.)

Your agency probably already enjoys strong relationships with a number of different partners and organizations, so focus on securing prominent links from their respective Web sites, e-communications and member directories. (Checked your chamber of commerce listing lately?) Where possible, secure links from publications in which you advertise and charities to which you donate financial or human resources. At the very least, request reciprocal links for all organizations listed on your own site. Your Internet Service Provider (ISP) should be providing a report that details exactly where visitors are linking from, which will help you refine that strategy.

3. Relevant content matters. So many agent sites are all about the agency, when they should really be all about the customer. Consider what customers think and worry about, and have your Web copy reflect those issues. Ask your ISP for top search terms and make sure they are integrated into your Web copy and metatags. (See below for more on metatags).

4. Fresh content is vital. Many Web experts now say that fresh content is the most important element of ongoing SEO. Their contention is that the search engines, after determining which sites have relevant information, then determine which sites have the newest relevant information. Businesses use a number of methods to refresh content on their sites, including posting newsletters, articles, press releases and white papers, or maintaining a blog. For the average independent agency, it makes sense to include a news box or “tip of the week” on the home page.

5. You can’t cheat on metatags. Another method of enhancing search-engine results is through the use of metatags and keywords. Metatags are the HTML code that provide each page’s title, description and keywords—the words that are used in your site and which the spiders can reference to index it.

Each page of your site should have its own metatags (don’t worry if there is some redundancy), and the keywords in your metatags should not be exactly the same as those in your Web copy, but generally mean the same thing. So, if you use the term Portland auto insurance in your Web site copy, then you might want to use car insurance 04101 in your keyword metatag. That way, whichever term a searcher uses, they should find you.

To see the tags on your or any other Web site, simply right-click on a Web page and click on “view page source.” A window will pop up with intimidating looking jargon and symbols. Look closely at the top and you’ll see followed by a series of words that make up the assigned title for that particular page. You also should see other “meta” lines beneath it that identify “description” and “keywords.” The words that follow each of these are what search robots reportedly look at when indexing your site. This is a handy way of making sure your own site’s metatags are current and effective—and for finding out how your competitors are positioning themselves.

Unfortunately, some unethical marketers have “stuffed” their keyword metatags with words that are irrelevant to their site, but are “hot” search words. (For example, if the sample agency above placed Tiger Woods or Lindsay Lohan in its keyword list.) At first, the search engines merely punished those offenders by dropping their search ranking or not indexing them at all. But more recently there has been concern that Google, Yahoo, etc., might not even bother with the keyword metatags any longer and instead look only at the title and description metatags. But enough Web strategists believe that keywords remain highly relevant, and since there is little cost in listing them, it’s recommend that agents use them.

Here are some SEO guidelines to consider when choosing metatags and keywords for site pages:

* Optimize those pages with significant customer content. Skip pages such as privacy policy and search.
* Each optimized page should have title, description and keyword metatags.
* Title metatags generally should identify the specific page and contain no more than 65 characters.
* Description metatags should not be much more than 200 characters and should describe the specific page, not the entire site.
* Keyword metatags should be no more than 250 characters, have comma-delimited phrases and relate to (but not repeat) the specific content on that page or within that area.
* It is not necessary to repeat in your keywords metatag words that already appear in your title or description.

Editor’s Note: Be sure to read next week’s edition of IN&V for more tips on SEO.

Maureen Wall (mwall@Aartrijk.com) is vice president of Aartrijk, a branding firm specializing in the independent agent and broker channel. Peter van Aartrijk (peter@Aartrijk.com) chairs the Agency Web Site, Search & Customer Functionality Working Group of the Agents Council for Technology (ACT).



Forms & Substance
Workers’ Compensation Experience Mods and Ownership Changes
The rules of transferring ownership are three-pronged.

There was a time when a high workers’ compensation experience mod could be reduced to 1.00 simply be creating a new corporation and transferring ownership to it. If the new owner had no prior experience, the mod would revert to 1.00, despite the fact that the exact same ownership, management, workers and processes were in place. That’s not possible now and hasn’t been for many years under NCCI rules.

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

“What is the rule with regard to workers compensation when an employee buys the company that he has been working for? The company changed from a corporation to an LLC. Will the company’s mod change?”

NCCI has a three-pronged ownership/classification/process rule regarding ownership changes. In the example cited, the employee would buy the mod unless there has been a change in operations, processes or hazards of the business.

The experience used to calculate a mod includes applicable payroll and actual incurred losses for all of the insured’s (owner’s) current and past operations within each state, including any operations that have been discontinued or self-insured until they drop off of the experience period. If an interstate mod is being calculated, the experience includes operations in all states, with some exceptions (e.g., monopolistic states) outlined in the manual.

The experience is included from all businesses of the insured under common majority ownership (the manual gives examples). These interests, and any changes of interests, are shown by submitting NCCI form ERM-14 “Confidential Request for Information” to the insurer. Supposedly this ownership rule exists for two reasons in particular.

First, the premise is that experience, loss control, etc. is a function of ownership and process. Second, the rule attempts to avoid what many insureds attempted in the past to circumvent the experience rating plan. For example, if the experience mod got too high because of poor experience in one state, some insureds would create a “dummy” corporation to transfer ownership to the new corporation, lower the mod on the remaining operation and give the new corporation a 1.00 mod. So, in addition to the common ownership rule, NCCI modified its change in ownership provision.

In general, the experience of any entity undergoing a change in ownership is continued and transferred to or retained by the experience rating(s) of the acquiring, surviving and/or new entity. The experience of any entity undergoing a change in ownership is excluded from future experience ratings only if there is:

* A material change in ownership (if there is any continuation in ownership interest, the interest must have been less than 1/3 ownership before the change or less than 1/2 ownership after the change).

* A change in operations sufficient to result in reclassification of the governing class code.

* A change in the process and hazard of the operations.

All three conditions above must be met, which is highly unlikely since it would be like selling a woodworking shop to a new owner who plans on turning it into an ice cream parlor.

If the purchaser of the entity does not have an existing mod, the mod of the entity becomes 1.00 if the experience of the acquired entity is excluded for the reasons above; otherwise, a mod is calculated from the applicable combined experience of the entity and the purchaser (if any). If the seller of the entity continues to be experience rated, its mod is revised to exclude all experience of the relinquished entity if NCCI is furnished with the experience necessary to transfer the data to the purchaser.

To read the entire article, click here.

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