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T H U R S D A Y , J U N E 1 4 , 2 0 0 7
Big “I” National News
P&C Trends
S&P Releases Mid-Year Report on Insurance Sector
Ratings remain stable, but industry still faces some hurdles.
Standard & Poor Ratings Services is expecting the outlook for personal lines writers, commercial insurers, reinsurers and life insurers to remain stable throughout this year, but each sector is going to face a unique set of challenges, according to S&P’s mid-year outlook for the U.S. insurance sector.
The likelihood of a continued flat yield curve, more mergers and acquisitions and a weak environment for individual life insurance product sales are some of the issues the industry is set to face during the next six to 12 months, the outlook says.
“Even though short-term trends in the U.S. life insurance sector are relatively benign, long-term trends are shaping the ratings environment,” says Grace Osborne, S&P Ratings Services managing director. “The determining factors, we believe, will be sustainable competitive position and operating performance, with appropriate ERM capabilities to manage emerging product risk and increasing pressure in speculative-grade credit default.”
Commercial lines ratings are expected to be maintained and supported by strong earnings and capitalization. Stable outlooks for commercial lines are up from 65% last year to 77%, which is encouraging according to John Iten, director at S&P. Iten credits the increase to a reduction in catastrophe losses and expects 2007 to be another strong year, but also says the predicted up-tick in catastrophe losses will lead to more modest improvement.
S&P’s outlook for commercial lines also predicts that “price deterioration may erode profits margins,” a continued decline in prices and price deterioration to gradually erode 2007 profit margins.
Personal lines also are supposed to continue to see marked improvements, despite the deterioration of rates in auto business. Risk-adjusted capitalization, underwriting discipline and profitability are all in good standings, according to the outlook. However, softening prices and increased competition in the auto sector could make sustaining margins difficult, says the report.
While growth within commercial and personal lines is projected to continue, the managed care sector is expected to be less profitable. According to S&P, ratings were “buoyed by moderate inflation in medical costs, the increased pricing power of consolidations, an expansion into new product lines and strong cash flows and capital adequacy.” S&P is expecting the managed care industry to perform at a slower pace than in the last two years, although earnings will likely remain strong.
Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.
 VIEW: In the States
Producer Licensing Reform Remains Evasive
Despite small improvements, more serious problems unresolved.
Many independent agents and brokers today are expanding their operations, servicing the needs of clients across state lines and simply operating their businesses in an increasing number of states---and these producers are finding that state insurance regulators impose a heavy burden on those that operate on a multi-state basis. One of the biggest challenges they face is obtaining and maintaining insurance licenses and this is often a costly, time-consuming, burdensome and bewildering endeavor.
Staying in compliance with the distinct and idiosyncratic agent licensing laws of every state is not easy and agents and brokers must dedicate tremendous financial and personnel resources in order to stay within the confines of state licensing laws. The burdens loom especially large for small and medium-sized agencies, which, like their larger competitors, are increasingly licensed in dozens of states.
Many in the insurance industry were led to believe that meaningful agent and broker licensing reform---and licensing reciprocity---would be forthcoming following the passage of the Gramm-Leach-Bliley Act in 1999 and the subsequent adoption of the NAIC’s Producer Licensing Model Act in most states. Despite minor improvements, however, producers are still waiting for reciprocity and reasonable uniformity in the state licensing process and many are impatient with the lack of progress being made.
Reforming the insurance producer licensing system in a meaningful and realistic manner has long been one of IIABA’s most significant public policy priorities. Although the association has not yet obtained the level of reform necessary in the marketplace, some smaller steps have been taken recently. For instance:
• The National Insurance Producer Registry (NIPR) has developed a nationwide repository of producer licensing information that allows regulators to share information about agents and brokers and establishes the technological infrastructure needed to issue nonresident licenses in an online and expedited fashion.
• The NIPR website (www.nipr.com) is quickly becoming a “one-stop shopping” facility for all licensing services, and agents can already visit the site to apply and pay for nonresident licenses in more than 45 states.
• Every state has eliminated the requirement that a nonresident applicant obtain a “letter of certification” in his/her home state and then send that document to other state insurance departments in order to obtain nonresident licenses.
• Agents licensed in multiple states are only required to satisfy the continuing education requirements of their home states.
• NIPR is now offering a new free service that allows a producer to submit an online notification of an address change to all states in which the person is licensed, thus eliminating the need to notify each state individually.
• More than 45 states have enacted a licensing exemption for nonresident agents handling multi-state commercial property and casualty risks (provided the agent is licensed in the state where the insured has its principal place of business).
• All state insurance departments are utilizing a common, national licensing application form.
Despite these modest improvements, the Big “I” remains unsatisfied with the speed and scope of the reforms being made. The association continues to pursue true reciprocity---which would allow nonresident agents to easily and efficiently operate in multiple states after qualifying for licensure at home---and other important reforms in all appropriate venues.
These advocacy efforts, thanks in large part to the active involvement of the Big “I” state associations and many local agents, are beginning pay off. Our message has been heard by state regulators and the leadership of the National Association of Insurance Commissioners (NAIC) has recently made licensing reform a top priority for 2007 and beyond. In fact, NAIC Vice President and New Hampshire Commissioner Roger Sevigny, a highly capable and effective regulator, will be hosting a meeting of a select group of insurance commissioners and industry representatives to discuss these issues on June 20.
The current licensing system remains cumbersome, confusing, expensive and rife with disparate and conflicting state requirements, and one cannot predict in good faith that meaningful reform is imminent. Nevertheless, small improvements are quietly being made and, if the leadership of the NAIC and state regulators is truly serious about implementing licensing reform, there is reason to hope that bigger leaps forward might finally occur.
Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president of, government affairs and state relations. IN&V readers are encouraged to e-mail Bisset with their thoughts on the current licensing system, examples of licensing problems and ideas for reform.
On the Hill
Big “I” Applauds House Committee for Reviewing Flood Legislation
Hearing examines reform of National Flood Insurance Program.
The Big “I” testified before the House Subcommittee on Housing and Community Opportunity this week in support of The Flood Insurance Reform and Modernization (FIRM) Act of 2007, H.R. 1682.
Tom Minkler, president of Keene, N.H.-based Clark-Mortenson Agency, represented the Big “I” in a hearing to review the legislation that would modernize and reform the flood insurance program. He expressed strong support for the legislation and urged the Financial Services Committee to pass H.R. 1682 to help consumers who are vulnerable to flooding and to shore up the National Flood Insurance Program (NFIP) for many years to come.
“The National Flood Insurance Program is essential to Americans and to the U.S. economy, and we strongly support your efforts to update it to reflect today’s risks,” Minkler says. “Adopting the reforms found in H.R. 1682 would help to make the National Flood Insurance Program more actuarially sound and more effective at serving both consumers and taxpayers.”
Minkler reviewed with the committee IIABA’s 23-point plan to restore the National Flood Insurance Program to sound actuarial footing, and he was extremely pleased to see a number of Big “I”-recommended provisions in the proposed legislation. The Big “I” is especially pleased that the bill will modernize the NFIP by increasing maximum coverage limits and by including, at the option of the consumer, the purchase of business interruption coverage, additional living expenses, replacement cost coverage for contents and basement coverage.
Minkler pointed out the three positive effects that modernization of coverages will have on the NFIP as a whole.
“First, it will allow consumers to more adequately insure their properties and valuables against their true risks,” he says. “This will in turn make the NFIP a more attractive product for consumers, thereby increasing participation in the program. And finally, as optional coverages that are sold at actuarial rates, the modernization will result in a NFIP that is closer to being on actuarially sound footing.”
Minkler also pointed out that the NFIP maximum coverage limits have not increased since 1994 and since then, the United States has seen a housing market boom of epic proportions. Labor and materials costs have skyrocketed, and yet the maximum indemnity a homeowner can receive for a flood loss is $250,000 or $500,000 for a commercial property.
“Hurricanes Katrina and Rita clearly showed that homeowners and businesses need higher National Flood Insurance Program coverage limits in order to properly insure their properties,” Minkler says. “An increase in the maximum coverage limits will better allow both individuals and commercial businesses to insure against the damages that massive flooding can cause, and we’re grateful that this increase was included.”
Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.
P&C Trends
Improve your D&O IQ – Part Three
What Water Buffalo liability?
From 1963 to 1966, Fred Flintstone was acting Grand Imperial Pubah of the Loyal Order of Water Buffaloes. He presumably presided over many lodge meetings during those three years and at least 10 TV episodes featured the antics of the Buffalo Lodge members during that time.
As an insurance agent, no doubt many agents have already asked themselves: “Did Flintsone consider his non-profit director’s and officer’s liability exposure?” A risk manager might observe, “Too infrequent and too severe a loss exposure to retain or control.” Naturally, they would conclude, “definitely a loss exposure well suited to insurance.”
People may laugh at the example of Flintstone being sued in the Stone Age, not to mention him receiving his defense from a barrister with only three toes, but non-profit board members should ask themselves about their exposure and insurance coverage. Perhaps a question much more important and closer to home is: Does an agent have personal liability for sitting on a non-profit board?
Consider a simple oversight like Flintstone selecting his neighbor Betty Ruble’s famous Gravel Berry Pie the winner in a local Water Buffalo pie baking contest. The excitement of her winning the grand prize is soon diminished when it becomes apparent she beat out a local pastry chef and maven of Burgertime in Bedrock who then alleges that he has suffered financial losses as his Gravel Berry Pie is no longer a big draw to his restaurant. Why the allegation that Flintstone is financially responsible for the losses? He failed to disclose his lack of impartiality in selecting his neighbor as winner. Is this some crazy example?
Looking once again at the Tillinghast D&O survey to find that far from crazy, non-profit organizations are sued for causing financial harm to others. Several weeks ago, Towers Perrin began providing Web-access, free of charge, to its D&O Survey Report, “2006 Survey of Insurance Purchasing and Claims Trends.” (Click herefor the complete survey in PDF and refer to Chart 84).
It turns out employment practices-related claims should be Flintstone’s biggest worry, but the list of potential liability exposures includes those likely to come from non-employees as well. Examples the survey respondents cite include a host of wrongful termination and related exposures but also breach of contract, defamation and retaliation. While these later sources of claims are much less frequent than employee related suits, agents and their insureds, like the erstwhile Pubah, are exposed.
As noted in last week’s IN&V article on D&O, many companies provide employment practices liability insurance coverage along with their D&O policies but you should evaluate the benefits of separate versus package policy approaches. See last week’s edition for some suggestions on insuring this exposure in for-profit and non-profits.
Paul Buse (paul.buse@iiaba.net) is president of Big “I” AdvantageSM.
Legal Advocacy
New Twist in Lawsuit Against State Farm
Hood sues State Farm for Hurricane Katrina damage.
In an unusual turn of events, Mississippi Attorney General Jim Hood sued State Farm on Monday for failure to honor its settlement agreement involving Hurricane Katrina damage.
In January, State Farm, plaintiffs’ lawyers and Hood announced a settlement agreement calling for State Farm to set aside $50 million to reopen potential claims of 35,000 Mississippi homeowners whose property was damaged by Katrina, but who had not sued State Farm. In exchange, Hood agreed to drop State Farm from a lawsuit filed against several insurance companies.
The settlement agreement was rejected by the judge in the case, Judge L.T. Senter, because of concerns about the binding arbitration requirement and a need for more information. The plaintiffs’ counsel then withdrew its motion for preliminary approval of the proposed settlement when the named plaintiff settled separately. After a few other procedural developments, State Farm reached a separate agreement with the Mississippi Insurance Commissioner George Dale that contained many of the same provisions that were in the original agreement that was rejected by Senter. The agreement with Dale is not subject to oversight by the court because it is independent of any litigation.
Hood has complained that State Farm has not provided Senter with the information he sought, and has said, “The court is open to approve (the settlement).”
According to State Farm, the agreement with Dale contains the same settlement provisions, but removes the set aside in fees for the plaintiffs’ lawyers and addresses many of the judge’s problems with the proposed settlement he rejected.
“You have to wonder,” says Mike Fernandez, State Farm vice president of public affairs, “what would motivate Attorney General Hood to disrupt an agreement that mirrors the one he was ‘happy to announce’ on Jan. 23 and asked other insurers to emulate as ‘a step to recovery’ two days later?”
In a letter sent June 8 from State Farm to Hood, before the new lawsuit was filed, State Farm declared that “there is no proposal we can conceive of which would enhance our extensive efforts already under way to resolve outstanding claims, through such means as the outreach program now proceeding under the auspices of the Mississippi Insurance Department (MID), and our ongoing settlement discussions with plaintiffs’ counsel in pending cases. While yet another class action, if it could be certified (a questionable proposition), may generate fees for lawyers, it will do little good for the people of Mississippi.” State Farm further maintained that the program agreed to with Dale was working, and the lawsuit by Hood would “severely compromise the goals of getting additional compensation into the hands of State Farm policyholders.”
According to a letter sent from State Farm’s attorneys to a Mississippi special assistant attorney general, the settlement reached between State Farm and Dale was not only consistent with the agreement that Hood endorsed in January, it also addressed many of Senter’s concerns. The letter also noted that the settlement process in the agreement with Dale was endorsed by Mississippi Governor Haley Barbour.
According to State Farm, letters regarding reevaluation of claims filed have been sent to more than 30,000 Mississippi policyholders and offers of payment to date total more than $10 million. However, according to Hood’s press release:
“The State Farm reevaluation procedure through the department of insurance has only resulted in a little more than 300 new offers. That does not comply with the terms we have with them in black and white.”
The lawsuit also claims that State Farm violated the proposed settlement agreement with Hood by failing to make “an offer of settlement to the policyholder based upon criteria and guidelines approved by the United States District Court for the Southern District of Mississippi.”
It is still premature to determine what will happen in the current suit or its potential impact. The theory is novel in that the agreement at issue was not approved by the court, a prerequisite for enforcement and the approval sought for the agreement was also withdrawn by plaintiffs’ counsel.
For more information, contact Big “I” Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.
Legal Advocacy
Class-Action Lawyer Under Investigation, Considering Retirement
Lerach may leave despite pending contingent commissions class action case.
According to recent press reports, legendary class action plaintiff’s attorney William Lerach is considering retiring from his law firm, Lerach Coughlin Stoia Geller Rudman & Robbins LLP, which is the lead law firm for the plaintiffs in the contingent commission class action currently pending in New Jersey federal court. Although not a household name, Lerach is well known in legal circles for being among the most aggressive class action plaintiff’s lawyers.
Lerach’s former law firm, Milberg Weiss & Bershad LLP was indicted last year for a kickback scheme where the government has alleged that the firm paid individuals to serve 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 those lawsuits from 1981 to 2005, some of which were insurance class actions. Lerach was a partner at Milberg Weiss during the time period the indictment covers, and he split from Milberg Weiss in 2004 to form his own West Coast-based plaintiffs’ class action law firm. Many observers perceive a close working relationship between Lerach’s current and former law firm as they both have been counsel to some of the same litigation.
While Lerach’s current law firm has not been indicted, his law firm has stated that Lerach was concerned that his past connection to Milberg Weiss had become a distraction. Lerach himself has not been indicted, but press reports, citing sources familiar with the investigation, claim that he is still under scrutiny by prosecutors.
Lerach Coughlin collected more than $7.3 billion in class-action settlements in 2006.
For more information, contact Big “I” Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.
L&H Trends
Lies, Damned Lies and Statistics
Federal government’s deficit amounts to $536,348 per U.S. household.
Anyone who attended a graduation ceremony this spring no doubt heard a reference to the fact that graduates owe a debt to the many people---parents, teachers, professors, coaches and friends---who have helped them along the way. Unfortunately, this statement is not merely a metaphor for the high school and college graduates of 2007. In reality, the previous generation is passing on a substantial debt to the current and future generations. According to USA Today, the official $248 billion deficit is greatly understated after applying the standards U.S. companies have to follow. In fact, when those standards are applied, the actual deficit balloons to $1.3 trillion in just one year---a five-fold increase.
The difference between the two numbers lies in the federal government’s simplistic approach in recording the cost of government entitlement programs like Social Security and Medicare on a pay-as-you-go basis versus prudently funding for the future liability (known as the normal cost in the actuarial world) of the payments. Corporations basically recognize the funding of their employee pension plans during the employee’s working career using appropriate turnover, salary increase and mortality assumptions and, most importantly, an assumed rate of return on the company’s pension plan investments. However, since the government has not set aside a single penny for future Social Security and Medicare benefits, the reality is that there is no rate of return to assume.
Why doesn’t the federal government have to record its liabilities in a fashion similar to U.S. corporations? The answer is that the White House (the current and previous administrations) and the Congressional Budget Office oppose any change because they argue that the entitlement programs are not true liabilities because the government can cancel or cut them. While there could be cuts to the so-called wealthiest of Americans, no sane taxpayer is politically naïve enough to believe that the Congress will cut benefits in a dramatic way for a broad number of people because they fear the political consequences.
So what are the implications for independent insurance agents? According to the USA Today analysis, based on current Social Security and Medicare benefits, taxpayers owe a record $59.1 trillion in liabilities, a 2.3% increase from 2006 and an average debt of $536,348 per U.S. household. USA Today, interestingly enough, reports that U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined. No doubt there will have to be some cuts to offset the potentially drastic increases in payroll taxes that will be required to support the large amount of outflows to retirees. Higher wage earners and people with substantial net worths will no doubt see a reduction in their benefits and, over time, the drum beat to remove the cap on the Social Security wage base will increase (currently $97,500), which will particularly hurt self-employed and small business owners. And, there will have to be further attention given to raising the normal retirement age for Social Security benefits, so many of us will have to continue to work later to receive full Social Security benefits.
Independent insurance agents should continue to educate and plead with their commercial (e.g. sponsor retirement plans for their employees) and personal lines customers to be fully aware of this problem and to review their retirement savings strategies. Agents need to look for a national solution, but also take steps immediately on a personal level.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.
P&C Trends
Fireman’s Fund CEO Resigns
Beneducci steps down after six months.
After six months on the job as Fireman’s Fund Insurance Co. CEO, Joseph Beneducci has stepped down from his post.
Chuck Kavitsky, president of Allianz of America and former Fireman’s Fund CEO, whom Beneducci replaced in January, has been named interim CEO, effective immediately.
Fireman’s did not give an explanation as to why Beneducci left, but said that his successor will be named “in due course.”
“Joe has been a significant part of Fireman’s Fund’s success and I want to thank him for his many contributions,” says Kavitsky in a Fireman’s release about the resignation. “We are fortunate that Fireman’s Fund has deep bench strength in its leadership team in addition to a strong position in the property-casualty insurance market. Our direction and strategy will continue as planned.”
Kavitsky served as chief executive of Fireman’s Fund from 2004 to 2006 before being promoted to president of Allianz of America last January.
As of Dec. 31, 2006, Fireman’s Fund had assets of $11.9 billion, with $3.0 billion in policyholder surplus. The company’s gross written premiums have grown from just over $3 billion in 1992 to $5.7 billion in 2006.
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