T H U R S D A Y ,  J U N E   2 6 ,  2 0 0 8   

**Editor’s Note: Insurance News & Views will not be published next week in observance of the Fourth of July. The next issue will be published on July 10. **

Big “I” National News

P&C Trends
Community Flood Coverage
Joining the NFIP has its benefits, but what happens when a community doesn’t participate?

Flooding across six states in the Midwest has damaged thousands of homes and businesses, leaving many insureds struggling to clean up the mess and area agents inundated with claims and questions from customers ---and not everyone has flood protection.

As the clean up from what some are calling a 500-year flood event begins, some communities affected by this month’s floods are suffering more than others because they didn’t take advantage of the National Flood Insurance Program (NFIP).The NFIP, part of the Department of Homeland Security/Federal Emergency Management Agency (FEMA), was established in 1968 to enable property owners and renters in participating communities to purchase flood insurance as protection against flood losses. Since its inception, more than 20,400 communities nationwide have joined the federal program, however not all communities, including several in the flooded region of the Midwest, have taken the necessary steps to gain eligibility.

Currently, less than 9% of residents in the high-risk areas of Iowa, Illinois, Indiana, Missouri and Wisconsin have flood coverage and less than 1% of residents in these states’ low to moderate-risk areas have flood protection, according to FEMA. Properties in high-risk areas that have a mortgage from a federally regulated or insured lender are required to carry flood insurance. However, FEMA estimates that approximately a quarter of all flood claims come from areas where flood insurance is optional. Property owners in low to moderate-risk areas often don’t consider flood protection unless it’s offered to them by their agent.

“Everyone is at risk for flooding. Everyone lives in a flood zone—it’s just a question of whether the property is in a low to moderate or high-risk area,” says Linda Mackey, Big “I” Flood Program manager. “Agents should be offering flood coverage to all their clients allowing the client to make the decision as to whether the coverage is needed and then if rejected, asking for the client’s signature on the flood rejection form for their permanent client records. Agents must be very careful when stating “needed” or “required” when talking about flood insurance.  It is always needed.” 

In order for a community to be included in the program, the community must apply to the NFIP with a resolution of intent that states an explicit desire to participate and a commitment to recognize flood hazards --- meaning they accept the floodplain maps; follow model building standards and floodplain ordinances as defined in the flood insurance act under Title 44 of the Code of Federal Regulations (44CFR) section 60.3.

Yet for some communities, enrolling in the program seems too costly from both a time and money standpoint since compliance with floodplain management requires taking flood damage reduction measures, which could also include dam or levee safety or something as simple as record keeping, according Mackey.

For communities that do invest the time and money into joining the program, the NFIP’s Community Rating System (CRS) offers incentives for areas that establish floodplain management programs beyond the NFIP’s minimum requirements. Premiums are discounted in communities that show innovative ways to prevent or reduce flood damage particular to their area, relocate or retrofit flood-prone property and preserve open space in the floodplain.

There is an alternative for flood coverage available for agents writing business in NFIP non-participating communities through the excess & surplus lines marketplace, which offers coverage for buildings and/or contents on residential and non-residential risks, and can include loss of income coverage. Generally the market uses guidelines similar to the NFIP, but each risk is individually underwritten and the coverage can be pricier, Mackey says.

FEMA has set up a Midwest flood response page on its Web site where agents can visit or direct insureds for more information on recovery and rebuilding efforts. Agents can also find a breakdown by state/providence of the communities included in the NFIP and their status at www.fema.gov/fema/csb.shtm.

Editor’s Notes: This is the first article in a two-part series on flood coverage. The next installment will be published in the July 10 edition of IN&V.

The Big “I” Flood Program does offer excess flood products for agents writing business in non-NFIP areas or for customers who want excess coverage over the NFIP primary limits. For more information, visit www.bigimarkets.com.

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




On the Hill
House Committee Passes Ground-Breaking Building Code Legislation
Bill will provide incentives for communities to institute and enforce building codes.

On June 24, the House Financial Services Committee passed H.R. 4461, the Community Building Code Administration Grant Act of 2007. H.R. 4461, introduced by Rep. Dennis Moore (D-Kan.) will provide awards to local governments for building code administration and enforcement. Specifically, the bill authorizes the program to give out $100 million over a five-year period with awards capped at $1 million per recipient jurisdiction. States and towns will also be required to match a portion of the funds awarded, and the bill outlines eligible uses of funds and selection criteria, with preference offered to governments in financial distress. Currently, there are no other federal programs solely for building codes.

Local governments can seek funding to help with enforcement through the Federal Emergency Management Agency (FEMA) or through federal block grants. However, there is a highly-competitive effort for such funds and they are generally used for infrastructure improvement projects. 

Strong building codes are the first defense against damage caused by natural disasters, and the Big “I” applauds the committee for taking decisive action to help communities secure their residents against the ongoing threat of natural disasters. Studies have shown time and again that proper mitigation through strong building codes protects both human life and property during major natural disasters. This legislation, by providing funding set aside specifically to incentivize building codes and the enforcement of building codes, is a welcome step in the national effort to protect both citizens and property against the threat of natural disasters. 

The bill received strong bi-partisan support and it is expected to pass the House of Representatives easily. The Big “I” strongly supports the adoption and enforcement of strong local building codes and has been working as a member of the Building Code Coalition to advance such interests in Washington, D.C. The passage of this legislation by the Financial Services Committee was also hailed by the Building Code Coalition, which said it “shows that there is a greater awareness that strong building codes are crucial to protect homes, businesses and lives during natural catastrophes.”

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




L-H Trends
Retirement Worries
Study finds even high net worth retirees are concerned about their financial security.

A new study from Cogent Research indicates that even affluent investors are expressing dread when it comes to their financial security during retirement. Furthermore, many high net worth retirees and pre-retirees show a significant lack of planning, confusion about the retirement income products available to them and a general mistrust toward financial advisors and asset management firms.

These and other findings are featured in a new study examining the behaviors and attitudes of pre-retirees, conducted by Cambridge, Mass.-based Cogent Research. The study, The Retirement Income Dilemma^TM, is based on a series of focus groups among affluent ($250,000 in investable assets) and high net worth investors ($1 million or more investable assets) ages 45 to 65. The groups were further segmented by investors who are at or near retirement, and others with retirement on the horizon in five to 10 years.

“This in-depth, qualitative study reveals that the perceived widespread ‘doom and gloom’ attitude about retirement planning —whether prompted by the news media or simply informal water cooler conversations—is rooted in reality,” says Alan White, project director, Cogent Research. “The fact that even the most affluent of investors among us show clear signs of anxiety, confusion and lack of direction suggests a budding retirement income crisis in America. Furthermore, it is clear that financial advisors and asset management firms have a long way to go in terms of proving themselves as resources to investors.”

The Retirement Income Dilemma^TM highlighted the following top 10 investor concerns:

1. Fear about not maintaining current standard of living.
2. Healthcare/prescription costs.
3. Availability of social security.
4. Outliving assets.
5. Inflation of U.S. dollar.
6. Market conditions/performance during retirement.
7. Leaving legacy for children/heirs.
8. Impact of taxes on income.
9. Paying for children’s education.
10. Caring for elderly parents.

What's interesting is that many of these top concerns can be addressed by independent insurance agents. Certainly, fears about not maintaining a current standard of living and outliving assets and inflation of U.S. dollar can be addressed through the use of inflation-adjusted immediate annuities. And Medicare supplement insurance and long-term care insurance can help to mitigate the costs for retirees concerned about healthcare/prescription costs and caring for elderly parents. Paying for children’s education and leaving a legacy for children/heirs can also be met through the use of Section 529 plans and permanent life insurance. In fact, independent insurance agents are well positioned to assist their affluent and non-affluent customers with meeting a number of their retirement objectives. 

Independent agents should revisit the breadth and depth of the products they offer to capitalize on their client lists and relationships. Ensuring that other risks --- personal liability, getting in a serious accident with an uninsured/under insured motorist and having adequate disability insurance --- are dealt with is the recipe for maximizing the value of being an independent insurance agent and providing holistic solutions to the agency’s customers. Research indicates customers have these concerns on their minds, so be sure to spend some time to discuss their needs on a periodic basis.

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




Forms & Substance
Determining the Value of a Homeowners Policy
Don’t insure a home based on how much an insured owes the bank.

Every agency has experienced this scenario to one degree or another: A client buys a house and the replacement cost of the dwelling is considerably less than the mortgage amount. The insurer refuses to issue a policy with a Coverage A amount greater than the replacement cost, but the lender insists on a policy limit equal to the mortgage amount, so what’s an agent to do?

An agent recently wrote into the Big “I” Virtual University with the following question:

“Must we insure a property for the mortgage amount if the replacement cost is less because the lender insists on it to protect their interest? In our area, selling price values are soaring, but replacement values are steady. For new purchases or refinancing, the loan officer will absolutely accept nothing short of the loan amount and they become angry and very threatening if we don’t do exactly as they demand. The insurance companies refuse to insure for more than replacement cost. What do we do?”

The lender’s position is understandable, but misguided. Clearly, they want to protect their investment. That investment consists of two components: 1) the real estate (land, home, outbuildings, etc.), and 2) the loan itself. Insurance is the mechanism designed to protect against the pure risk of loss to the real property. However, the loan itself is a speculative business risk...that’s not the function of insurance.

As an example, let’s say the purchase price and loan amount for a home is $200,000 --- for the sake of simplicity, forget about any down payment. This $200,000 represents market value, not insurable value. The cost to rebuild the home itself might be $140,000, with the $60,000 balance being the value of the land and other structures. The purchase price includes the value of land, all structures, and even other property that may not be covered by a homeowners policy.

The purchase price may also include the perceived “value” of the location. For example, consider two new homes, both built from the same floor plan by the same contractor. The asking price for one is 50% higher than the other based solely on the location of the home in a “preferred” neighborhood. The cost to rebuild the homes would be virtually identical.

In the example above, a homeowners policy would never pay more than $140,000 if the home was completely destroyed unless required to by a state’s valued policy law (which is another reason for not insuring the loan amount). There has been no damage to the land or the “location value” (or at least the policy isn’t going to pay that amount), so it would largely be pointless to insure the property for more than the structural replacement costs.

It does not serve the bank’s interest in any way to be the mortgagee on a policy with a policy limit equal to the loan amount because neither the insured nor the bank will ever collect that amount. The policy will only pay an amount based on the valuation method included in the contract. Again, this is the case if no valued policy law applies...if it does, then the insured could actually profit from the loss by insuring the loan amount rather than the replacement cost of the property. This would violate one of the fundamental tenets of insurance and, conceivably, could create a moral hazard.

If an insurance company issues a replacement cost (or, worse, an ACV) policy with a limit greater than the actual cost to repair or replace, they may be in violation of the insurance laws in most states. All states require that rates/premiums be adequate, not excessive, and not unfairly discriminatory. What these banks are asking is that the insurance company issue a policy with an excessive premium (payment for coverage the insured can never collect without a total loss and triggering of a valued policy law, which has a likelihood of maybe 1-3%) and that’s probably illegal.

To respond to these issues, a number of states have passed laws prohibiting a lender from demanding an insurance amount in excess of the replacement cost of the property.

To read the entire article, including the citation of several of these state laws, click here.

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




Agency Management
Eight Ways Loyalty Pays
A customer’s experience can make or break their loyalty.

Have some goals regarding career or business success? In today’s high-speed, competitive market you’d be crazy not to—and even crazier not to keep customer loyalty at the front and center of your intentions.

Former Dell CIO Jerry Gregoire alluded to the critical importance of achieving customer loyalty when he said, “The customer experience is the next competitive battleground.” The customer experience makes or breaks customer loyalty. And with so many choices today, it’s the quality of the experience—how you repeatedly make your customers feel at each and every touch point—that will determine whether or not they'll come back, purchase more and refer their colleagues and friends to you.

It’s all about the customers’ perception of the value you deliver, both tangible and intangible. You may think you know the kind of customer experience you’re delivering, and that your customers share your views. You may think that because your customers stick around and don’t complain they are loyal. The reality is you may be mistaking customer inertia for loyalty. It’s easy to do. Remember loyalty is a genuine emotional attachment that occurs when customers appreciate the value of the product or service, as well as the way it’s delivered. Because they repeatedly feel powerful, positive emotions in dealing with you they’ll choose you over competitors—even if they have to go out of their way or pay a bit more.

Yes, strong customer loyalty pays. It puts your business into a profit-building cycle in a number of common sense ways:

1. Loyal customers buy more and are often willing to pay more. This creates a steadier cash flow.

2. Loyal customers refer others to your business, saving you the marketing and advertising costs of acquiring customers.

3. Loyal customers are more forgiving when you make mistakes—even big ones—especially if you have a system in place that empowers employees to correct errors on the spot. Then loyal customers become even more loyal.

4. A loyal customer’s endorsement can surpass the most extravagant marketing efforts.

5. Thriving companies with high customer loyalty usually have loyal employees—and loyal employees save you money in a variety of ways. You don’t have to spend money attracting, hiring and training new employees, and you have knowledgeable people at all levels of the organization serving the customers and each other.

6. Thriving companies with high customer and employee loyalty are generally known to outpace their competitors in innovation. In addition, their cultures support continuous learning. In today’s market, if you’re not continuously learning and innovating, there’s no question that you’re falling behind.

7. Loyal customers understand your processes and can offer suggestions for improvement. Their feedback can help with R&D efforts as well as improvement efforts.

8. Profits, profits and did we say profits? An increase in your retention of customers can boost your bottom line profit 25 to 100% depending on your fixed costs.

To read the entire article, click here. 

JoAnna Brandi is a speaker, consultant and author of “Winning at Customer Retention – 101 Ways to Keep ‘em Happy, Keep ‘em Loyal, and Keep ‘em Coming Back” and “Building Customer Loyalty - 21 Essential Elements in ACTION.”