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Big “I” National News

P&C Trends

P-C Industry’s Net Income and Profitability Fall in First Quarter
Net earned premiums, overall loss and loss adjustment expenses rise.

After the first quarter of 2007, the property-casualty insurance industry’s net income is $15.8 billion---falling behind the $16.7 billion it drew in during first-quarter 2006.

The decline in net income resulted in the p-c industry’s annualized rate of return on average policyholder surplus dropping to 12.9% for the first quarter, down from 15.5% in the first quarter of 2006 and 17.9% in 2005, says ISO and the Property Casualty Insurers Association of America (PCI).

“Insurers’ 12.9% rate of return for first-quarter 2007 was 1.8% points above insurers’ 11.1% average first-quarter rate of return since the start of ISO’s quarterly data in 1986, but it fell short of the rates of return typically earned by firms in other industries,” says Michael Murray, ISO’s assistant vice president for financial analysis. “During the 24 years from 1983 to 2006, the comparable rate of return for Fortune 500 averaged 13.9%, and escalating competition in insurance markets suggests insurers’ rate of return will fall further below that earned by firms in other industries rather than rise to meet it.”

While net income was down in first-quarter 2007, net written premiums rose $0.9 billion to $111.4 billion, up from $110.5 billion in the previous year. However, written premium growth slowed to 0.8% in the first quarter from 1.8% in 2006---the weakest showing since 1992, according to Murray.

“Market surveys and U.S. government data indicated that escalating competition and declines in the price of insurance are cutting into premium growth,” Murray says. “Despite ongoing problems in some coastal property insurance markets exposed to hurricanes, commercial premium rates for tenants and household insurance rose a scant 0.1% countrywide---far less than the 4.2% increase in the CPI for repair of household items.”

Net earned premiums climbed $2 billion to $108.6 billion during the first quarter up from $106.6 billion in 2006 and earned premium growth slowed to 1.9% this year from 2.7% in 2006.

“Other evidence that escalating competitive pressures are cutting into premium growth include the gap between premium growth and overall economic growth,” says Genio Staranczak, PCI’s chief economist. “In first quarter 2007, net written premiums were up 0.8% from a year ago, while the nation’s gross domestic product (GDP), which takes into account both inflation and real growth, increased 4.6% during the same time frame. That premiums grew only about one-sixth as much as GDP is an indication that intensifying competition is leading to lower prices for most coverages in most location, though property insurance remains scare and expensive in some coastal areas.”

Overall loss and loss adjustment expense increased by $1.1 billion (1.6%) to $70.4 billion in the first quarter from $69.3 billion in 2006 and non-catastrophe loss and loss adjustment expenses increased by $1.3 billion (1.9%) to $69.1 billion from $67.8 billion last year. However, direct insured losses from catastrophes feel to $1.3 billion in the first quarter of the year, down from $1.5 billion in 2006, says ISO’s Property Claim Services unit.

The net gain of $8.3 billion on underwriting in the first quarter accounts for 7.6% of the $108.6 billion in net earned premiums for the first three months of the year. In 2006, the net gain was $8.4 billion on underwriting and amounted to 7.9% of the $106.6 billion in net earned premiums for the same period.

The combined ratio for first quarter 2007 improved to 91.78% from 91.1% in 2006, with the change in the combined ratio reflecting an imbalance between growth in premiums and the cost of providing insurance.

“The combined ratio for first quarter 2007 is the second best for any first quarter since 1986 (when ISO’s records begin), but it wasn’t good enough for insurers to achieve the rate of return typically earned by firms in other industries,” Murray says. “With first quarter 2007 investment results, financial leverage and tax rates, ISO estimate that the combined ratio would have had to improve to 89.6% in order for insurers to have earned the 13.9% long-term average rate of return for the Fortune 500.”

Overall the first quarter of the year was decent in comparison to past years; however, the performance in the first three months of 2007 is an indicator that the record-breaking profits of 2006 were a peak for the industry, according to Bob Hartwig, president and chief economist for the Insurance Information Institute.

“The financial performance of the property-casualty insurance industry during the first quarter of 2007 was generally excellent, but at the same time provided confirmation that the industry is now past its cyclical peak in profitability of 14% achieved in 2006,” Hartwig says. “The only question that now remains is how long the decline in profitability will last and how many years it will take to get to the bottom.”

With the first quarter of the year in the books, ISO is predicting homeowners and businesses will pay approximately $2.175 billion in property losses resulting from the six catastrophes (in 25 states) that occurred during the second quarter 2007. According to preliminary analysis from ISO, this year’s second quarter catastrophe total ties the record for the second-lowest in a second quarter in the last 10 years. The six catastrophes accounted for approximately 504,000 claims and year-to-date the estimated number of claims is 709,000, according to ISO.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

Legal Advocacy

With Justice Department Declining to Intervene, Whistleblower Suit to Continue
Several companies under fire for supposed defrauding of NFIP.

A federal judge in New Orleans determined July 9 that the whistleblower lawsuit filed by a group of ex-insurance adjusters, Branch Consultants, LLC, against seven insurance companies and their subcontractors will continue. This has recently come to light because the lawsuit previously was “under seal” and thus not subject to public disclosure like most lawsuits.

The case involves allegations that insurance companies defrauded the National Flood Insurance Program by submitting flood claims for Hurricane Katrina damages caused by wind or rain which should have been covered by the homeowners’ policies. The defendants are Allstate Insurance Co., State Farm Fire and Casualty Co., Liberty Mutual Fire Insurance Co., Fidelity National Insurance Co., American National Property & Casualty Co., Travelers, American Reliable Insurance Co., Pilot Catastrophe Services Inc., Crawford & Company, Allied Claims, NCA Group Inc., Simsol Insurance Services Inc. and other unnamed parties.

Given the federal government’s potential interest in the case, the federal judge had ordered the U.S. Department of Justice (DOJ) to take over the prosecution of the case or appear in court to explain why is was not involved. The government filed a memorandum with the court explaining why it was not participating, and on Monday, the judge withdrew his order for intervention and direct involvement by the DOJ, and allowed the case to proceed with Branch Consultants.

Despite the DOJ’s decision not to participate directly in the lawsuit, it says it will remain interested in the case and may intervene at a later date if the evidence warrants.

The case now goes into the discovery phase of litigation where the parties produce documents and responses to questions to seek support for or undermine the various claims made.

For more information, contact IIABA Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.

Legal Advocacy

Class Action Lawyers Under Fire
Former Milberg Weiss partner agrees to plead guilty to involvement in kickback scheme.

The U.S. Attorney’s Office in Los Angeles announced July 9 that Milberg Weiss partner, David Bershad, agreed to plead guilty to a kickback scheme. Bershad is a former managing partner of Milberg Weiss, but has been on a leave of absence from the firm. He faces up to five years in prison for his role in the alleged conspiracy, although it has not been determined if he will serve any time in jail as a result of the guilty plea. As part of the plea agreement, Bershad has agreed to forfeit $7.75 million, pay a $250,000 fine and cooperate with prosecutors. One of the former named plaintiffs to whom Milberg Weiss allegedly paid kickbacks, Steven Cooperman, will also enter a guilty plea. A trial is set for January 2008 to adjudicate the kickback allegations against Milberg Weiss and another of its partners, Steven Schulman.

As IN&V reported last month, former Milberg Weiss partner William Lerach is considering retiring from his law firm, Lerach Coughlin Stoia Geller Rudman & Robbins LLP. The firm has stated that Lerach was concerned that his past connection to Milberg Weiss had become a distraction due to the indictments. Lerach has not been indicted, but press reports, citing sources familiar with the investigation, claim that he is still under scrutiny by prosecutors.

These indictments and guilty pleas could be seen as a sign that the government is cracking down on frivolous class action lawsuits that plague the insurance industry, both as a defendant and as the insurer of defendants. The alleged kickback scheme involving this well-known law firm may not signify an end to these class actions, but may serve as a signal to those and other firms in the same arena that the plaintiffs in the lawsuits filed must be actual victims and not just paid to participate. It may also cause some attorneys to take the risks of fraudulent or unethical behavior more seriously when financial penalties and jail time are at stake.

For more information, contact IIABA Associate General Counsel Kathleen Graber at 703-706-5432; kathleen.graber@iiaba.net.




VIEW: L&H Trends

Help Customers Deal with Life Events
Keeping apprised of insureds’ lives has its benefits.

Independent insurance agencies frequently have great opportunities to use customer information (within reason) to provide proactive solutions for a variety of insurance needs.

For example, my daughter is a recent college grad starting out on her own career path. Fortunately she has an internship that she hopes will lead to a permanent position. But even if she becomes a full-time employee, she won’t be eligible for medical insurance until Oct. 1. Knowing that her rent in New York City is a big burden, my wife and I decided to help her out with the three months of COBRA coverage, which amounts to more than $400 a month. And now that she lives in the city, she no longer needs a car, so we notified our independent agent to drop her from our policy, effective July 1.

This scenario creates several opportunities for the agent. After receiving our notice to  drop our daughter from our automobile policy (and off my personal umbrella liability policy), the agent could take the opportunity to send us a letter  about “bridge” medical insurance policies and “gap” exposures that many young people face after graduation until they land a full-time job providing benefits. (Several companies specialize in providing bridge COBRA coverage, which involves a catastrophic policy that usually makes sense for young, healthy individuals, and lowers the premium cost.) This service would help inform me of the risk and provide a solution that would save me money.

The second opportunity is to include information about renter’s insurance in the letter. Even if the graduate is leaving the area, it is still a nice gesture and shows the customer (parents and graduate) that the agent has their best interests at heart. The letter could also include information about how to use the Agent Locator feature on the Trusted Choice® Web site to locate a Trusted Choice^® agent located where the graduate now resides.

While you should make the most of every opportunity that your clients presents, there are some data mining avenues that are impermissible (for more in-depth information, agents should go to the Legal Advocacy section of the Big “I” Web site and click “Legal Advocacy”). Agents should be familiar with Gramm-Leach-Bliley’s restrictions and with HIPPA’s privacy regulations. For example, an agency that provided medical insurance and helped process a medical insurance claim indicating someone sustained injuries in an automobile accident cannot share this information with the agency’s personal lines’ department for quoting purposes because the medical insurance policyholder might be getting a big increase from his “lizard” carrier. Use caution with anything that involves health information that the agency becomes privy to by serving their medical insurance customers.

Having the agency provide information during logically timed life events creates a strategic opportunity.

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




Agency Management

A New Wave of Workers
Attracting next generation of employees may be tougher than in past.

First there were the baby boomers, then Generation X and now the workforce is welcoming a new crop of workers---Generation Y.

Attracting new talent is already one of the biggest challenges an independent agency faces, but drawing in employees from the latest generation of workers is becoming even harder as these new college grads bring with them a new set of demands and expectations.

Approximately 64 million workers will be able to retire by 2010, according to the Conference Board, and these retirees will be replaced by members of Generation Y (born from 1978 to 1990) who are looking for a much different kind of work than their predecessors.

Sharon Cunningham, president of the Business Management Group in Hartford, Conn., has been providing consulting services to agents since 1983 and works with independent agents, regional and national brokers and bank-owned agencies throughout the country to improve their recruitment activities. As a baby boomer herself, Cunningham identifies with her generation but recognizes the importance of attracting the newest generation into the workforce.

According to Cunningham, one of the insurance industry’s biggest problems with drawing in younger workers is that it hasn’t devoted much time to recruiting and addressing the challenges of meeting younger workers’ needs.

“The industry hasn’t devoted time to recruiting,” she says. “You’d think something would’ve sprouted up, but there’s not much going on at schools and universities---so you don’t have that steady stream of new people in the industry.”

Cunningham believes the top three factors for recruiting young employees are compensation, work-life balance and job enrichment or growth. Other key factors include flexibility in the job, recognition for accomplishments, autonomy, job security, responsibility, challenges and the reputation of the business/agency, but these are much less crucial in the recruitment process.

Like those from generations’ past, many Generation Y-ers are drawn to a particular job for one major reason: money. They expect job offers and they expect them to be good offers, Cunningham says. Unlike baby boomers who were of the mindset that starting from the bottom and working their way up was how to progress through the workforce ranks, Generation Y-ers seem to have a greater sense of entitlement. They think the job is all about them, Cunningham says.

“They look at a job as a place for them,” she says. “They say ’train me, pay me, take care of me.’ The job is all about them. They don’t want to be put in a job and just left there. They want attention from managers.”

Job flexibility is another major difference between the current generation and previous ones. Today’s workers don’t want a standardized 40-hour-per-week, 9-5 job; instead they are all about the work-life balance. Instead of working five days a week, they want a four-day week or a longer vacation, and employers have to be willing to be flexible when it comes to hours if they want to attract new talent.

“I see a lot more part-time people or people working remotely,” she says. “There are all kinds of arrangements being made now to get a good person and keep a good person.”

Technology is also a key component of the next generation. Generation Y is a connected one of ipods, BlackBerries and text messaging. Its members view these things not as conveniences, but as necessities for everyday life and going without them for even a short period of time is unacceptable. Striking a balance between allowing for these items without impeding productivity is extremely important in attracting new hires to an agency. Outlawing them is one of the quickest ways to turn a prospective employee off to a position, Cunningham says.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.