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Big “I” National News

On the Hill
House Subcommittee Passes Agent Licensing Reform
Legislative action is a huge step forward for independent agents.

Do you have multiple state licenses? Then you know the headaches and inefficiencies your agency faces on non-resident licensing. Yesterday, the House Financial Services Subcommittee on Capital Markets took the first step in creating a streamlined and more efficient non-resident licensing system for independent agents. The subcommittee marked-up three pieces of insurance legislation, including H.R. 5611, the NARAB (National Association of Registered Agents & Brokers) Reform Act (NARAB II). The other bills considered by the subcommittee were H.R. 5840, the Insurance Information Act, and H.R. 5792, the Increasing Insurance Coverage Options for Consumers Act.

Agent licensing reform, embodied in the NARAB II bill, is the No. 1 federal legislative issue for the Big “I”. H.R. 5611 would establish NARAB to provide for nonresident insurance agent and broker licensing while preserving the rights of states to supervise and discipline insurance agents and brokers. Reps. David Scott (D-Ga.) and Geoff Davis (R-Ky.) introduced this bipartisan bill in March 2008 and as of yesterday, aside from Reps. Scott and Davis, there were 47 bipartisan cosponsors of the bill. Prior to its consideration, several insurance industry groups announced their support for this legislation, including the National Association of Insurance and Financial Advisors (NAIFA), the National Association of Mutual Insurance Companies (NAMIC), the Property Casualty Insurers Association of America (PCI) and the Council of Insurance Agents and Brokers (CIAB), as well as a number of individual insurance companies. The National Association of Insurance Commissioners (NAIC) also recently endorsed an updated version of the legislation.

The Big “I” has long supported the use of targeted federal legislation to reform the state system of insurance regulation, and H.R. 5611 is a prime example of such reform. Such a pragmatic approach utilizes the many years of regulatory experience and resources of the states to produce a more efficient and effective regulatory framework. As for the legislation’s mechanics, membership in NARAB would not affect resident licensing, would be voluntary and would not affect the rights of a non-member agent or broker under any state license. Insurance agents and brokers could remain licensed in the traditional manner, obtaining nonresident licenses on a state-by-state basis if operating in multiple jurisdictions, or they could apply for NARAB membership and one-stop nonresident licensing. States, other than a member’s home state, would also be prohibited from imposing licensing, continuing education, corporate qualification and foreign company registration requirements, among other requirements, on association members.  Essentially, membership in NARAB would be the functional equivalent of a nonresident insurance producer license issued in any state where the member pays the required licensing fee. NARAB would not be part of, or report to, any federal agency and would not have any federal regulatory power.

Given the short legislative calendar, it is unclear how far the legislation will proceed in the legislative process this year, but the subcommittee’s action is a huge step forward in solving the problems faced by agents in obtaining nonresident licenses. Passage of this bill by this subcommittee also shows that discretely using targeted federal legislation to reform insurance regulation is the most viable solution for modernizing and improving the state system of insurance regulation.

Tom Koonce (tom.koonce@iiaba.net) is Big “I” assistant vice president of government affairs.




Producer Compensation Issue Update
Good News/Bad News on Contingent Commissions
New York court offers vindication, but N.Y. officials announce hearings.

There is perhaps no issue that stirs the emotions of the insurance world more than the seemingly unending, dubious and often politically motivated attacks on contingent commissions that have continued for nearly four years. Every agent and broker in the industry remembers how then-New York Attorney General Eliot Spitzer uncovered a bid-rigging scheme involving Marsh Inc., AIG and other prominent names in the industry and used these allegations to suggest that the receipt of legitimate incentive compensation by main street producers created an inherent conflict of interest. The insurance community continues to recover from Spitzer’s reckless acts and accusations, and the perpetual debate has now taken a couple of new twists and turns. 

The good news is a New York State appellate court has, for the second time in less than nine months, issued a ruling confirming the legality of contingent commissions. In its consideration of a case brought against Liberty Mutual by Spitzer two years ago, the New York Supreme Court, Appellate Division, First Department, threw out all claims associated with incentive compensation. The court relied on existing precedent and found that “contingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between the parties, defendants had no duty to disclose the existence of the contingent commission agreement.” The court did determine that the claims relating to potential bid-rigging were valid and could be pursued. 

In the wake of Spitzer’s initial allegations, several mega-brokers and large insurers entered into legal settlements that prohibited them from receiving or paying nearly every meaningful form of incentive compensation. Very few insurers were willing to stand up to the attorney general’s bullying tactics and challenge his initial assertions that contingent commissions are illegal and produce conflicts of interest. Liberty Mutual, however, chose an alternative path applauded by agents. They defended their practices and principles (even though it meant a court fight), did not back down in the face of considerable pressure and won an important victory for the industry. 

However, IN&V reader who enjoyed an extended Fourth of July vacation last week may have missed some less pleasant news that arose on another front. The New York State Insurance Department announced it will be holding a series of three public hearings on issues involving insurance producer compensation and contingent commissions.  Insurance Superintendent Eric Dinallo said at the time of the announcement, “those who sell insurance deserve to be fairly compensated and those who buy insurance deserve to be fairly treated,” and the “hearings will help us understand how best to ensure the marketplace is competitive, transparent and for to all.” The hearings are scheduled for July 14 in Buffalo, July 23 in Albany and July 25 in New York City, and they will be held jointly with the office of current New York Attorney General Andrew Cuomo. 

Given the history of New York state officials with regard to these issues, many insurance agents and brokers are understandably anxious and concerned about where this all might be heading. The public hearing notice did little to alleviate those concerns and asks witnesses to comment on the following:

* A potential new regulation (a draft of which has not been released) regarding permissible forms of insurance producer compensation and disclosure by insurance producers of all forms of compensation.

* Whether insurance producers operating in New York should be mandated to make “full disclosure” to clients concerning their complete compensation and to obtain written consent from those clients (at the time of initial policy issuance and at renewal).

* Whether contingent commissions create an irreconcilable conflict of interest. 

The mega-brokers who agreed to forego contingent commissions in 2005 with great fanfare – including Marsh, Aon and Willis – may be hoping these hearings are the first step toward the outright elimination of such incentive compensation for all agents and brokers or a weakening of their own settlements. Marsh’s general counsel, Peter Beshar, confirmed this sentiment in a July 8 Wall Street Journal story on Marsh and the upcoming hearings when he was quoted as saying “we need a level playing field.” In the same story,  Dinallo stated that one of the reasons for holding the hearings was to determine whether the state should either ban contingent commissions altogether or to allow everyone to receive them under a certain set of circumstances. 

The Big “I” national and New York associations will be participating in the upcoming hearings and actively representing the interests of agents and brokers across the country.

Wes Bissett (wes.bissett@iiaba.net) is the Big “I” senior counsel, government affairs.




P&C Trends
E&O and the Midwest Floods
Avoiding E&O claims once the water recedes.

As Midwesterners continue to recover from one of the worst floods in the last decade, many independent agencies are processing claims and helping their insureds get back on dry land. However, some agents are facing questions from customers stranded in high water without flood coverage.

Most agents can write coverage through the National Flood Insurance Program (NFIP), a part of the Department of Homeland Security/Federal Emergency Management Agency (FEMA), provided their community participates in the program. Yet, not everyone in NFIP-participating communities is aware of the coverage or chooses to opt-in --- especially those in low to moderate-risk flood areas --- which could leave agents facing E&O claims when the water recedes.

Approximately 5% of E&O claims involve flood coverage, according to the Big “I” Professional Liability Program. Typically, E&O claims involving flood pertain to: a failure to offer flood coverage; failure to advise clients of limitations in flood coverage; or failure to offer or recommend contents coverage, which makes it a good idea to offer coverage regardless of flood risk, according to Dave Hulcher, director of Big “I” agency E&O risk management.

“From an E&O perspective, it is a good idea to offer flood coverage to even those clients not required to carry limits by their mortgage lender,” Hulcher says. “Offering coverage to customers can prevent exposure to gaps in coverage, offers another way to serve the customer and provides an opportunity to earn additional revenue through the sale of more coverage.” 

But what E&O issues arise when a community isn’t participating in the NFIP program and flood coverage is not easily attainable? And what obligation does an agent have to provide coverage when a community isn’t enrolled and there is not a market readily available? According to Hulcher, the answer varies by state, depending on the standard of care and insurance laws and regulations.

“There are some things you can do to protect the agency from potential E&O claims when the community you service does not participate,” he says. “The first thing the agency can do is to be upfront with the client and let them know that you will have difficulty meeting their insurance needs. You can draw attention to the exclusion of flood coverage in their policies and let them know that their community does not participate in the NFIP. Having this in writing contained in the client file will provide the basis for a solid defense should a claim arise from failure to provide coverage. Further, if you work with an excess and surplus lines brokers with access to flood coverage outside the NFIP, let the client know how you are going to help them attain coverage.” 

Agents who place coverage on an E&S policy form need to make the client aware that the policy is not subject to the state guarantee fund in most states --- if the carrier becomes unable to meet its claims obligations at a future date. Agents may also need to look a little harder at the financial ratings of E&S carriers and share this information with their clients. Finally, Hulcher suggests agents without a market for coverage should let their clients know, in writing, that the agency does not have a market and coverage will not be put in place, and encourage customers to look for coverage elsewhere. 

Editor’s Notes: This is the second article in a two-part series on flood coverage. The first installment,   “Community Flood Coverage,” was published in the June 26 edition of IN&V.

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




P&C Trends
An “It” List of Insurance Companies
Ward Group identifies independent agent carriers as some of the top in the industry.

The Ward Group, a consulting firm specializing in the insurance industry, has released its list of the top 50 property-casualty insurers and several independent agent companies made this year’s ranks.

Ward annually analyzes the financial performance of more than 3,000 p-c insurers in the U.S. to identify the top insurance companies for its Ward’s 50 (to view the list, click here). In order to be considered for the list, a company has to pass all safety and consistency screens and achieve superior performance in the previous five-year time frame the group uses to compile the list.

“It’s important for companies to remain focused on meeting revenue goals while maintaining an efficient operating model that enables them to meet customer demands,” says Jeff Rieder, president of Ward Group. “The best companies excel at balancing expense management, technology deployment and customer service.”

In addition to selecting the top 50 insurers, the Ward Group also identifies the best practices that set these companies apart from their competitors. This year the group found three key components present in each of the top-ranked insurers.

Expense Management
When it comes to expenses, insurance companies are under constant pressure to be more efficient, and since personnel tends to be the biggest cost for companies, the insurers on Ward’s 50 have developed practices to maximize their investment. This year, the top 50 companies produced an 18.7% return on average equity from 2002 to 2007 compared to the industry average of 14.6%. They also processed 13% more policies per employee and maintained a 10% lower expense ratio, according to the Ward Group. In addition, their average compensation (including salary, benefits and bonus) that was $3,800 lower than others in the industry.

“These companies are able to lower personnel costs through effective management of benefits programs, better management to staff ratios and salary programs that are fair, but not excessive, in the market,” the Ward Group says. “In addition to lower costs per employee and higher employee productivity, employee turnover for these companies is nearly 25% lower than the industry.”

Technology Deployment
On average, p-c insurers spend more than $7,000 per employee for occupancy and related support costs. However, technological advancements in the way of communications, workflow management and Web-based technologies are allowing companies to replace old systems and save time and money in the process. The insurers on Ward’s list have embraced these new technologies, allowing them to thrive, according to Rieder.

“Top performers deploy nearly 5% more employees working from home than the average company,” he says. “As a result, these companies reduce overhead expenses, achieve higher workloads and can place the critical customer-facing employees closer to where they are needed in the field.’

Customer Service
Keeping insureds happy is a main priority for anyone in the industry because it means customer retention and renewed policies. And the companies on Ward’s 50 seemed to have figured out how to do just that. Ranked companies consistently have a higher average policy retention rate of 5%, which comes as no surprise to Rieder.

“Top performers anticipate the needs of their customers and find ways to work with them efficiently,” he says. “As a result they are rewarded by keeping their business.”

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




L-H Trends
Defining EIAs
SEC’s plan to treat equity indexed annuities as securities draws heat.

With mounting questions about  Equity Indexed Annuities (EIA) being defined as a security, the Securities and Exchange Commission (SEC) is considering moving regulation from insurance regulators to broker/dealers.

EIAs are a hybrid investment vehicle because, while the ultimate rate of return may be a function of stock returns, the key selling feature is an underlying floor guarantee of the investor’s investment --- regardless of whether stocks generate positive returns. The concept sounds simple, but there is a myriad of considerations including length of contract, insurance company investment and contract expenses and the method of crediting returns. The bottom line is insurance agents are not currently required to be registered representatives of a broker/dealer, but instead must follow the insurance requirements of the particular state they are licensed in. Similarly, there has been concern that the complexity of the EIAs places them more in the arena of securities.

For independent insurance agents, if the SEC ends up classifying EIAs as securities, agents who are not registered representatives would have to become licensed or cease selling the product. An important related question then becomes, “what form of regulation would best serve consumers who might consider buying an EIA?” The SEC has requested comments on the draft proposal and there have been in excess of 40 comments received. Generally, they fall into two camps: 1) people who believe the SEC is a more appropriate forum to regulate EIAs and 2) people who believe state-based insurance regulation has appropriate safeguards. Agent Bernard Bender falls into the latter category.

“I do not understand… if (I) have no say whatsoever in the investment of an index annuity, and the gain is guaranteed not to go down if the market loses money and there is a minimum guarantee, why would this be considered a security,” he says.

One comment in favor of the SEC’s new definition comes from is Robert Ow who comments: “Unlike many stock brokers in the industry, I come from an insurance background and have known many people in the life insurance/annuity business,” he says. “In my 27 years of experience I have seen several registered representatives drop their registration but continue as an insurance agent. Without exception, these agents would take advantage of their clients’ gullibility and sell them ‘garbage annuity contracts’ that are inappropriate under any circumstance.” 

It will be interesting to watch as the debate over this issue unfolds and the Sept. 10 deadline for comments approaches. And for independent insurance agents who sell EIAs, there will no doubt be a lot more feedback on the SEC’s proposal.

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