T H U R S D A Y ,   J U N E   2 9 ,   2 0 0 6

        Big “I” National News

O N   T H E   H I L L
Big “I” Testifies on Crucial Need for Natural Disaster Legislation
Soto advocates ‘national solution for national problem.’

Once again, the Big "I" was among the invitees to testify before a Congressional subcommittee regarding a crucial insurance issue, this time natural disaster legislation. It marks just the latest opportunity in which the Big "I" earned a place at the table as Congress makes important decisions affecting the insurance industry. Big "I" President-Elect Alex Soto and Mississippi Big "I" member David Treutel, who experienced devastation of his agency and his home, testified.

Soto, president of Miami, Fla.-based InSource, Inc., represented the association Wednesday before the Subcommittee on Housing and Community Opportunity. He made the case that insuring against natural disasters is a national problem, that there is a federal role in natural disaster preparation, and that several introduced pieces of legislation that deal with this issue need Congressional attention.

"The Big ‘I’ believes that both states and the federal government have roles to play, but that there is a need for a federal solution to be in place before the events happen—to have a clear, well-structured mechanism that encourages the private sector to handle as much of the risk as possible, and only consider a federal role as a last resort upon private marketplace failure," Soto said. "We believe that such a structure will protect both consumers and taxpayers living in all areas across the country—especially when history has proven that more tax dollars are going to be spent on disaster assistance without a structure to encourage the private sector to take on additional risk."

Soto noted Big "I" support for H.R. 846, the Homeowners’ Insurance Availability Act, introduced in 2005 by Rep. Ginny Brown-Waite (R-Fla.). The bill would allow private insurers to purchase, at auction, reinsurance contracts directly from the U.S. Treasury to cover natural disasters that are equal to, or greater than, a one-in-100-year event.

"We believe this is a strong proposal because it will encourage more companies to enter at-risk markets, thus increasing availability and market stability, while limiting federal involvement to only the most devastating catastrophes," Soto noted.

Soto also mentioned other pieces of natural-disaster legislation, including the following bills, and noted that Congress had not yet acted on any of these bills:

• H.R. 2668, the Policyholder Disaster Protection Act, introduced by Rep. Mark Foley (R-Fla). This bill would permit insurers to create tax-free reserve funds for natural disaster claims.
• H.R. 4836, Catastrophic Savings Account Act, introduced by Rep. Tom Feeney (R-Fla.). This bill would create tax-free, personal catastrophic savings accounts.
• H.R. 4366, the Homeowners Insurance Protection Act of 2005, introduced by Reps. Ginny Brown-Waite (R-Fla.) and Clay Shaw (R-Fla.). This bill would make state catastrophe funds eligible for federal reinsurance.
• H.R. 4507, the Natural Catastrophe Insurance Act of 2005, offered by Rep. Carolyn Maloney (D-N.Y.). This bill would establish a federal program to provide reinsurance for state natural disaster insurance programs.

"It is simply not enough to say that the private sector can handle this risk, when it does not, and in reality, consumers face severe availability and affordability issues," Soto said. "Turning our back on policyholders who need coverage is never a recipe for a stable economy and unacceptable to our members and customers."

Soto stressed that, despite the Gulf Coast hurricanes garnering most of the attention due to their ferocity in 2005, natural disasters affect all areas of the country, which means that national solutions are required.

"Whether it is tornadoes in the Midwest, earthquakes in California or ice storms in the northeast, we all face some risk of natural disaster, and it often takes only one or two events in an area for the homeowners’ insurance market to be dramatically affected," Soto said.

Treutel, who closed the day’s testimony, told the committee of the disastrous consequences his business, the Treutel Agency, suffered when it was flooded by Hurricane Katrina. He made the case that homeowners and consumers need true natural disaster reform, and that the homeowners of Mississippi and the country need the industry, the states and the federal government to work together to provide available and affordable insurance for all perils – wind, flood, fire, earthquakes and more.

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/government relations.

O N   T H E   H I L L
Big “I” Supports House Members’ Call for Terror Risk Answers
Seven representatives ask Treasury to examine key market, preparedness issues.

This week, the Big "I" supported a call by seven House members for an examination of a number of key issues related to terrorism risk insurance.

The seven representatives, in a letter to Treasury Secretary John Snow, requested that the upcoming report of the Presidential Working Group on Financial Markets (PWG) examine and address five key issues:

• Lack of a viable reinsurance market.
• Difficulty in calculating risk.
• Impediments to a free-market response.
• Increasing take up rates and decreasing government exposure.
• Nuclear, biological, chemical and radiological (NBCR) risk.

Among those who signed the letter: Reps. Pete Sessions (R-Texas), Richard Baker (R-La.), Deborah Pryce (R-Ohio), Sue Kelly (R-N.Y.), Eric Cantor (R-Va.), Vito Fossella (R-N.Y.) and Michael Ferguson (R-N.J.).

The signers noted, in their letter, that only a limited amount of private-sector terrorism reinsurance is available; that the unique and unpredictable nature of terrorist attacks makes it difficult for insurers to calculate risks; that the current marketplace for terrorism insurance is imperfect; that ways of encouraging greater take-up risks need to be explored to expand capacity and risk-spreading capability; and that the effects of NBCR attacks can vary so widely that it is impossible to predict with any certainty or probability the severity of such an event.

"This letter accurately assesses the state of the marketplace as it relates today to the thorny issue of terrorism risk insurance," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "It is virtually impossible to assess when or where an attack may come---and how much damage it will cause. This makes it extremely difficult for the insurance marketplace to adequately provide coverage for such an event. The seven representatives are to be commended for raising these issues, and we support their call for the exploration of solutions to these concerns."

Also in the letter, the seven representatives pose a number of questions, including the following:

• Do the Treasury Department and other PWG members believe that adequate, available and affordable reinsurance and primary insurance exists now or will exist by the time the Terrorism Risk Insurance Extension Act expires Dec. 31, 2007?
• What financial mechanisms are available to the marketplace to enhance the private market capacity to take on terrorism risk when TRIEA expires, particularly for NBCR coverage?
• What additional steps can the federal government take now to ensure the availability of NBCR coverage and help the marketplace to insure against catastrophic NBCR losses?
• How would future federal government involvement in NBCR terrorist losses affect the way insurers, reinsurers and other sources of private capital view and underwrite conventional terrorism risk?
• In what ways can the public and private sectors encourage greater take-up rates to build loss-coverage capacity and spread risk, while reducing taxpayer exposure?

"These seven members deserve credit for asking tough questions about the terrorism risk insurance marketplace, both now and when the federal backstop expires," says Brendan Reilly, Big "I" assistant vice president for federal government affairs. "These questions need to be asked now so that we have the answers if and when we need them. Terrorism risk poses a tremendous number of uncertainties, and we need to address those uncertainties as best we can, so that we can find ways to insure against this risk. We believe there is a federal role in this discussion, and we encourage the Treasury Department and the President’s Working Group to address these important issues."

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/government relations.

A G E N C Y   M A N A G E M E N T
Is Sarbanes-Oxley Working?
Study says Sarbanes-Oxley creating burden for small businesses.

In July of 2002 the Sarbanes-Oxley Act took effect. Now, four years later, people are wondering: Is it working? Does the law stop crooked businesspeople from making bad and illegal decisions? Sarbanes-Oxley requires the top officers of public companies to certify in writing the accuracy of their income statements, balance sheets and other financial documents.

Complying with Sarbanes-Oxley could come at a high price for small businesses. According to the RAND Corporation’s new study, "Going-Private Decisions in the Sarbanes Oxley Act of 2002," the act has a disproportionately negative affect on small companies.

According to the study, the costs associated with ensuring compliance do not equal the benefits for public companies with less than $20 million in market capitalization.

"On the cost side, smaller firms must spread the costs of complying with SOX over a more modest operational size; in many cases, they lack the accounting staff to monitor the effectiveness of their internal controls," the study says.

As a result, many public companies are being acquired by private companies, which are not subject to Sarbanes-Oxley regulations. Just one year after the act was established, small public companies became 53% more likely to be acquired by a private company.

The study’s authors hypothesize that this may have happened because "maladapted firms realized their susceptibility to the new regime and went private immediately, leaving behind public firms that were better suited to the new regulatory environment."

So is Sarbanes-Oxley hurting or helping U.S. business? It may be helping clean up the acts of large public companies, but it’s burdening some smaller businesses. The study finds that, "to the extent that SOX induced small firms to exit the public capital market immediately after it was passed, it demonstrates negative consequences for entrepreneurship that transcend cost increases for firms that remained in the market."

The debate over whether to rewrite (or even scrap) the anti-corruption rules of the Sarbanes-Oxley Act is heating up again in Congress and in the business community. Some business leaders complain that the basic template approach to the internal reporting requirements places an unnecessary and costly burden on small public companies with the costs outweighing the benefits, while other leaders believe the requirements lead to them being less competitive than their global peers.

On an even larger scale, not focusing on effectiveness, some Sarbanes-Oxley critics question its significance. Now that prosecutors in cases against Enron, WorldCom and Tyco International, among others, have secured guilty verdicts in some of America’s most prominent cases of fraud, some observers say the strict, expensive, time-consuming regulation isn’t necessary anymore.

"The regulation isn't necessary because the legal system is working," says Scott Richardson, an accounting professor at the University of Pennsylvania's Wharton School of Business, reports MarketWatch. Critics say that the high-profile trials culminating in extended prison sentences are sufficient deterrents for executives. Critics say Sarbanes-Oxley is punishing the good along with the bad.

Proponents of the law as it is admit that it has flaws worth reviewing, but claim now is not the time to do away with it. While admittedly the threat of spending time in prison is a strong deterrent, advocates say that Sarbanes-Oxley spurred these guilty verdicts, and continues to help curb offenses while providing more transparency into the business world.

Emily Crane (emily.crane@iiaba.net) is Big "I" media relations manager. Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

C A R R I E R   N E W S
Big “I” on Swiss Re-GEIS Deal

On Friday, June 9, Swiss Re completed its acquisition of GE insurance Solutions. This transaction also finalizes the acquisition of the Big "I" agency E&O program.

"The acquisition portends great things for the national E&O program" Mark Male, Westport Insurance Corporation’s national accounts manager, said on a call with Big "I" staff. "Swiss Re is a highly respected and very financially secure company that matches with this industry-leading program and top insurance agency trade association."

"IIABA has made many contributions to key insurance issues and initiatives that have benefited our industry," said Robin Sterneck, president of Swiss Re’s Commercial Insurance of the Americas. "Westport Insurance is proud of its longstanding relationship to IIABA and its members. Our professional liability teams have worked together side-by-side for 20 years, helping members insure their businesses and protect their reputations in a rapidly changing and increasingly complex environment. Westport Insurance Company is now part of Swiss Re. We bring a 143-year history of excellence in strength, security and service. We look forward to continuing this relationship and serving the needs of IIABA and its members."

Big "I" CEO Bob Rusbuldt called the acquisition an extremely positive development for agents and the national E&O program. "With the endorsement of the national association, in combination with the grassroots capabilities at our 51 state associations, we look forward to growing our relationship with a like-minded and prestigious insurer like Swiss Re," he said.

The Big "I" Professional Liability Program, known for leading the insurance agency/broker professional liability industry in providing innovative coverage, has consistently been one of the top association insurance programs in the United States. Nearly two-thirds of Big "I" member agencies obtain their professional liability coverage through the program. Member agencies access the program through the trusted counsel of their Big "I" associations, and watching over the program at the national level is a committee of volunteer members, state associations and national staff.

Mark Wolf (mark.wolf@iiaba.net) is Big "I" assistant vice president of Agency E&O Operations.

L & H   T R E N D S
The Silver Lining of Rising Interest Rates

Federal Reserve watchers predict that the Fed will continue its upward march of interest rates to dampen inflation. If this prediction is correct, then the overnight fed funds rate (the overnight rate that banks can borrow from) will reach 5.25%. While short-term interest rates significantly increased during the past two years, the long-term interest rate paid on 10-year and 30-year U.S. Treasury debt instruments is only slightly higher than the overnight rate. However, economists point to reasons for the flat yield curve, and eventually long-term rates will have to rise more proportionately to the changes in short-term interest rates. The increase in interest rates generally will be bad news for the economy because it increases the cost of business and consumer borrowing, which leads consumers to decrease purchases of automobiles, houses and other items.

If you’re a saver by nature, there is some silver lining to increasing interest rates. In the 1980s, which brought us personals computer and music videos, retirees loved the high interest rates that they received on Certificates of Deposit (CDs). Life insurance agents also loved higher interest rates, especially in light of another decade innovation: universal interest rates. Insurance agents were trapped longer into the low-guaranteed policy values of traditional whole life insurance, which produced the mantra "buy term and invest the difference." Also, fixed annuities (single premium deferred annuities) paid double-digit rates (as long as the carrier could pay it) became the norm enjoyed "locking in" high interest rate contracts.

Today, we’re are a long way from the high interest rate environment of the 1980s---and hopefully the interest rate increases will soon cease.

Use this as an opportunity to offer customers a way to take advantage of rising interest rates. Immediate fixed annuities are a straightforward product that provide guaranteed income for life and, if selected, income for a beneficiary. Prevailing interest rates influence the payout amount and long-term rates influence the monthly payout since insurance companies have to invest for the long term to meet annuity obligation. Fixed annuities are not an investment. They are an insurance product because they usually guarantee payments for the lifetime of at least one individual.

However, an immediate annuity is a viable asset allocation opportunity for retirees. For example, take a husband and wife, age 65 and in good health, who have a total of $500,000 in their retirement accounts. Currently, a 65-year-old man can receive about $8,500 a year based on $100,000 used to purchase an immediate annuity. With the remaining $400,000, they plan to invest about half of the balance in dividend paying stocks and the other half in government bonds, including Treasury Inflation Protected Securities. This type of asset allocation maintains purchasing power risk by owning stocks and mitigates the impact of inflation by owning TIPS, which adjust the principal face of the bond based on inflation increases and decreases.

Independent agents who provide several quotes from well-rated insurance companies provide a valuable service to customer---while receiving a commission that is typically 2% of the annuity contract. Since an annuity is opposite of the risk of underwriting a life insurance policy, insurance companies are not concerned with the annuitant’s health and accordingly, there is no underwriting. (Of course, someone in ill health is a bad candidate for an immediate lifetime annuity.) If long-term interest rates continue to rise, given the volatility of the stock market, many retirees will be interested in immediate life (and joint and survivor annuities). If your agency doesn’t currently offer this service, now is the perfect time to revisit this opportunity.

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