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Big “I” National News

P&C Trends

Category 7: Fact or Fiction?
New book examines effects a record-breaking storm could have on Northeast.

What if a hurricane more powerful than any storm in the history of meteorology hit the Northeast coast—a storm so strong that it registered a new category on the Saffir-Simpson scale? What would be the effect on the area, its residents and the insurance industry?

Meteorologist Bill Evans and Marianna Jameson’s new fiction book, “Category 7,” includes just such a hypothetical situation. In the book, Hurricane Simone is off the Saffir-Simpson scale, measuring in as a Category 7, when it slams into New York City.

But is such a devastating hurricane possible?

There have only been three hurricanes, The Labor Day Hurricane in 1935, Hurricane Camille in 1969 and Hurricane Andrew in 1992, to register as Category 5 on the scale. The scale, based on wind speed, ranks hurricane intensity from Category 1 to 5 and gauges the potential property damage and flooding expected. A Category 4 hurricane, with winds between 131 to 155 mph, has the strength to take roofs off buildings, destroy entire homes and cause flood surges two stories high. Hurricane Katrina was a Category 3 and left the Gulf Coast in complete wreckage. So what would a Category 7 look like if it were to hit the Northeast?

Evans, a nationally known meteorologist for WABC in New York City, lived through Hurricane Camille and understands the effects a storm could have on the area. In the book, he hypothesizes that a storm of that magnitude would cause a storm surge of 40 to 50 feet and winds between 200 to 250 mph. The devastation would flood the east and west sides of Manhattan and 10-foot high flood waters would extend from Midtown to Battery. Evans also forecasts that the subway system would be completely flooded and the city’s bridges would sustain substantial wind damage.

According to Bob Hartwig, president of the Insurance Information Institute , a storm off the scale is highly unlikely, however the chances of a hurricane making landfall and causing significant damage to the area is not far-fetched.

“The odds of a storm of a size he (Evans) is envisioning hitting New York directly are pretty remote, but it is possible to have storms that are strong, say a Category 3—and the likelihood (of it hitting) increases as you move out to Long Island and New Jersey,” he says. “The worst-case scenario would be a strong Category 3 or weak Category 4 that could produce losses of $100 billion spread across New York, New Jersey and Connecticut and those would be losses of significant damage to businesses and an enormous amount of business interruption coverage.”

The last time a major storm to hit the Northeast was in 1938 when the Long Island Express hurricane made landfall with wind speeds of 121 mph, causing $6.2 million in damage ($15 billion, 1998 adjusted). According to Hartwig, if a storm of that magnitude were to hit today, it would cause an estimated $35 billion in damages.

In addition to the fictional category for the storm, there is another quasi-fictional twist in Evans’ book: Simone is a manmade storm. The hurricane is a product of a rogue weather science concocted by a billionaire to gain vengeance on the U.S. president in the book. While this sounds a lot like science fiction, there has been extensive research done in the field of weather manipulation, according to Evans. Cloud seeding has been attempted to curb draughts in Mississippi and an inventor in Florida has created a product called Dynogel designed to be released from an airplane in order to weaken and dissipate thunderstorms, but there has yet to be significant enough advancement in using weather as an actual weapon. If manipulating weather ever becomes a real threat, using it would be a violation of the international declaration against environmental modification that was passed by the United Nations in 1977; however, the insurance industry is prepared for the possibility.

“Right now, your insurance covers you against wind damage no matter how it occurs. But let’s say Al Qaeda figured out how to control the weather; if you had terrorism insurance, it would be included and most businesses in Manhattan have it,” Hartwig says.

Hurricane season began June 1 with forecasters predicting an above-average season for 2007, however, thus far things have been relatively quiet on the storm front. Yet the lack of named storms this season doesn’t mean the industry is in the clear—a lot can still happen between now and the end of the season in November, according to Hartwig.

“This week (Aug. 3), forecasters are expected to release new forecasts. My guess is that they will reduce the number of storms they predict,” he says. “Statistically, the season really picks up in August and reaches a peak in September and then moves its way through October. The fact that the season has been mercifully light doesn’t tell us much. In 1992, with Andrew, that storm began with an ‘A’ and happened on Aug. 24 and that stood for 14 years as the worst storm on record.”

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

Forms & Substance

Can Unlicensed Individuals Receive Commissions?
Law may say ‘yes,’ but  regulator may still say ‘no.’

Achieving and maintaining compliance with the insurance licensing rules of the various states is an ongoing challenge and burden for agencies, and many agents, industry observers and insurance regulators may not be as knowledgeable about recent changes in the law as they should be. Given the ever-changing nature of regulatory requirements, even industry experts may not be aware of the current state of the law in some cases.

Last week’s issue of Insurance News & Views included a story on commission sharing and included commentary from some of the Virtual University’s top experts on the question of whether commissions can legally be paid to and/or shared with unlicensed people. The experts suggested that “it is illegal in most states to split commissions” with unlicensed individuals and that agents or insurers “cannot pay commission to someone who is not properly licensed.” Such views are not uncommon and may even be the prevailing opinion of most practitioners, but they may not accurately reflect the statutory requirements in place in many states today.

For many years, nearly every state prohibited an unlicensed individual or entity from receiving any portion of a commission. In the early part of this decade, however, most states enacted significant producer licensing reform legislation that was designed to establish licensing reciprocity among the states and to implement uniformity in certain key areas. These state licensing bills were based on the Producer Licensing Model Act, a proposal adopted by the National Association of Insurance Commissioners and endorsed by the National Conference of Insurance Legislators.

The model bill includes a section concerning the payment of commissions and a provision that specifically addresses the payment of commissions to unlicensed persons. That provision —Section 13(D) of the model—permits insurers or insurance agents to pay or assign commissions and other compensation to (1) insurance agencies and (2) any other individual or entity that does not “sell, solicit or negotiate insurance.” This section, which is now the law of many states, was intended to eliminate the former commission-sharing prohibition and to permit the payment of commissions to those that are not engaged in an act that would otherwise require the person to be licensed. It was also intended to allow commissions to be paid to agencies, without the agency being forced to first obtain an entity license.

So, if these potentially significant changes have been made to the laws of most states, why aren’t more agents and insurers taking advantage of them? Part of the reason is that these revisions to the code are still relatively new and are not yet well known to many in the industry. A more complex and troubling reason for the industry’s hesitancy to embrace and utilize the new commission sharing rules is that some regulators are not implementing them as intended. Despite the clarity of the PLMA and the new state statutes, there are regulators who act as though the provision does not exist or who craft tortured interpretations that suggest no substantive change in the law.

Insurance regulators have a duty to implement the statutes passed by their legislatures and signed by their governors, yet regulators in some states fail to comply with the letter and spirit of the law in the producer licensing arena. The implementation of the PLMA’s more liberal commission-sharing rules is just one example; another is the hesitancy and resistance of some state regulators to implement interstate licensing reciprocity as required by state and federal law. IIABA is actively working with the NAIC and individual state insurance departments to address this problem, and the Big “I” is urging regulators to comply with their own licensing laws and to permit the enacted reforms to take hold.

Agents and companies interested in taking advantage of the new commission sharing rules should first make sure that any jurisdiction in question has adopted a provision similar to Section 13(D) of the model act. However, agents and companies may want to consult with their state association, legal counsel and/or department of insurance for more information about what is permissible in a particular jurisdiction. Although the state law is the ultimate authority and may authorize the payment of commissions to unlicensed persons, practitioners should be aware that the regulators in some places may have a different view.

Wes Bissett (wes.bissett@iiaba.net) is Big “I” senior vice president, government affairs and state relations.

On the Hill

House Passes Bill with Major Cuts to Crop Insurance
Proposed amendments to undermine crop insurance program defeated.

The U.S. House of Representatives passed the 2007 Farm Bill July 27 by a vote of 231 to 191. The 2007 Farm Bill reauthorizes farm programs for an additional five years and makes historic investments in fruit and vegetable production, conservation, nutrition and renewable energy. However, because of serious budget constraints and an increasingly widespread view amongst the Congress that the Federal Crop Insurance Program (FCIP) must be reformed, the bill also includes significant cuts to all aspects of the FCIP. Most troubling for agents were provisions that dealt with the Administrative and Operating (A&O) reimbursement, which represents the amount companies receive from the U.S. government for the administration of the program. Companies, in turn, use a portion of their A&O reimbursement to pay crop insurance agents their commissions for crop insurance sales.

The 2007 Farm Bill includes a total of a 2.9 point cut to the A&O (from 24.5% of premium to 21.6%), which could lead to a reduction in service to America's farmers and could affect the livelihood of all crop insurance agents. The Big “I” strongly opposed this provision.

Additionally, the 2007 Farm Bill passed by the House contains a troubling provision that would directly tie the amount in taxes, royalties and fees that offshore oil companies pay to the amount that independent insurance agents would earn for selling crop insurance policies. Specifically, after 2012, if the government’s receipts from the rule’s increase in taxes, fees and royalties for offshore oil companies are ever less than they were for 2012, the secretary of agriculture is to make up the difference by reducing the A&O reimbursement rate from the FCIP. Every crop insurance industry participant, including the Big “I,” strongly opposes this provision. 

“The Big ‘I’ is not only concerned about the size of the cut to the A&O included in the House-passed farm bill, but also the fact that the bill somehow directly ties the amount of revenue the government gets from taxes on offshore oil to crop insurance agents’ commissions,” says John Prible, Big “I” assistant vice president for federal government affairs. “We are strongly opposed to both the size of the cuts of A&O and this tying of the A&O to offshore oil revenue and will oppose both provisions vigorously as this legislation moves through the legislative process.”

The 2007 Farm Bill does have a number of important policy changes to the FCIP that the Big “I”supports, the most important one being the permanent repeal of the law authorizing premium reduction plans (PRPs). While the PRPs were created to attempt to provide discounts to farmers on their crop policies by encouraging companies and agents to save administrative expenses and pass those savings along to the farmers, the implementation of the discounts clearly showed that the PRPs have the undesirable effect of cutting service to farmers and encouraging discrimination against smaller farmers. The Big “I” commends the House for including the permanent repeal of the flawed PRPs in the farm bill.

During the House floor consideration of the 2007 farm bill, the Big “I” successfully fought off two amendments that would have crippled the delivery of the crop insurance program. The two amendments, one offered by Rep. Cooper and one by Rep. Kind, would have cut A&O reimbursement by 7.5 and 9.5 points, respectively. Both amendments failed on the House floor, although the Cooper amendment did pick up 175 votes in support, which illustrates the battle facing crop insurance for the foreseeable future.

“We are enthusiastic that Congress rejected these two amendments by Cooper and Kind, as they would have undermined the private delivery of FCIP to such a point that the continuity of the entire program would have been in doubt,” says Charles Symington Jr., Big "I" senior vice president for government affairs and federal relations. “We are particularly proud of all Big ‘I’ members that contacted their members of Congress in opposition to these two amendments, as without their active grassroots participation we may have seen a different outcome. We will be closely following the developments of the farm bill and the A&O reimbursement rate in particular, as the Senate considers its own version of the legislation.”

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

On the Hill

Addressing Issue of Regulatory Reform
Rusbuldt reaches out to treasury secretary on Big ‘I’ stance.

Earlier this month, Big “I” CEO Bob Rusbuldt sent a letter to Treasury Secretary Henry Paulson outlining the Big “I” position on regulatory reform. The letter came in response to the Treasury’s announcement of an examination of the regulatory structure for U.S. financial services providers.

The letter expresses support for reforms that would bring more efficiency and uniformity to the state-based insurance regulatory system and opposition to the creation of an optional federal charter for insurance. The Big “I” believes regulatory reforms should be undertaken in a way that preserves the state-based structure and utilizes the experience and expertise of state regulators.

The letter read as follows:

July 13, 2007

The Honorable Henry M. Paulson Jr.
Secretary
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Dear Secretary Paulson:

On behalf of the Independent Insurance Agents & Brokers of America, comprised of more than 300,000 agents, brokers and their employees across the country, I applaud your recently announced examination of the regulatory structure for U.S. financial services providers to increase global competitiveness. As you undertake this task, the IIABA encourages you to consider regulatory reforms that will improve and enhance the state-based system of insurance regulation.

The IIABA understands the need for greater efficiency and uniformity in insurance regulation and supports targeted federal legislation to streamline the current state-based system, particularly in the areas of agent/company licensing, surplus lines, and speed to market. Federal legislation establishing national standards where necessary would improve efficiencies, reduce costs, and reform the marketplace while maintaining and improving the state insurance regulatory system and the many benefits it provides to consumers.

While some in the insurance industry advocate for the creation of an optional federal charter (OFC), for insurance, the IIABA believes that an OFC would create problems rather than solve them. An OFC would result in the creation of a new federal bureaucracy on top of the current state-based system, thereby increasing inefficiencies and regulatory overlap. However, a pragmatic and targeted approach establishing national standards, using preemption, and utilizing other federal tools to improve functional regulation would be a rational and efficient way to enact appropriate insurance regulatory reforms. This approach would utilize the many years of regulatory expertise and resources of the state-based system and would not further increase the size of the federal government. 

Despite some inefficiencies and uniformity challenges, state insurance regulation has worked effectively to ensure insurance company solvency and protect both individual and business consumers. Because consumer needs vary from region to region, particularly in the property-casualty marketplace, local officials are necessary to meet those needs. Hurricanes, earthquakes, hail, tornadoes, tsunamis, mudslides, wild fires, blizzards and more are many times unique to certain regions and states. The rates of automobile theft and accidents, home burglaries, arson and other risks vary widely from state to state and city to city, and the regulatory system needs to be relevant to the primary risks and consumer needs of that state or locality. The claims process, the distribution system, the guaranty fund system and other components of the insurance industry are unique in many respects and unlike the banking system. Unlike a distant federal regulator, state regulators understand marketplace differences and can respond quickly and appropriately. Accordingly, we believe the state-based regulatory system should be preserved, but we support pragmatic regulatory reforms that would streamline the current system. Federal legislation that mandates uniformity where and when necessary via national standards would result in appropriate reforms to the marketplace and improved insurance regulation.

Please feel free to contact me if you would like to discuss our views on insurance regulatory reform and our support for a targeted federal legislative approach in more detail. We look forward to working with you on these issues.

Sincerely,

Robert Rusbuldt
CEO

Patrick Royal (Patrick.royal@iiaba.net) is Big “I” director of public affairs.

Forms & Substance

Tenant Arson = No Building Coverage?
Don’t rely on tenants’ policies to protect buildings.

The Virtual University “Ask an Expert” service recently received the following question: “We have an insured who leases a building to a tenant under a triple net lease. The tenant is responsible for insuring the entire building. In the event the tenant commits arson and destroys the building, how do you protect the building owner's interest in the property under the tenant's policy?”

There’s an easy answer to this question: You don't. There are a number of issues with triple-net leases, including several pitfalls that arise anytime responsibility to insure a building is relegated to the tenant.

Although such insurance requirements are standard operating procedure for many building owners, why anyone with an asset of that magnitude entrust the insurance—and the control that goes along with it—to a tenant? The only assumption is that a lawyer or financial adviser (neither of which knows anything about insurance) recommended this for legal, tax or other reasons.

Let’s say that the building owner's tenant has insured the building but is experiencing financial troubles that would be lessened if he were able to get some insurance proceeds on the business property he can't sell, and perhaps for the building he knowingly over-insured.

Let’s assume the building is insured under an ISO package policy. Here's what the Commercial Property Conditions CP 00 90 says:

A. Concealment, Misrepresentation or Fraud
This coverage part is void in any case of fraud by you as it relates to this coverage part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact concerning:
1. This coverage part;
2. The covered property;
3. Your interest in the covered property; or
4. A claim under this coverage part.

If the tenant commits arson, the policy is void. When someone voids a contract, it's as if it never existed. It does not matter what the landlord’s “insured” status is because there is no coverage for anyone. If you owned a $2 million building, would you entrust the insurance to someone you know little, if anything, about?

Under the typical mortgage clause, there is coverage for a mortgagee if the mortgagor commits fraud or otherwise negates coverage without the knowledge, consent or participation of the mortgagee, but that's not the case here.

To read the entire article, click here.

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